For the second time in 2016, the global geo-political landscape has shifted dramatically with the election of Donald Trump as the 45th President of the United States.
The victory by Donald Trump looks to have been much more comfortable than almost any commentator was expecting – and indeed the election has seen a much stronger vote for the Republican Party than even the Republican Party itself expected.
Words being used to describe the result are ‘tectonic’, ‘revolutionary’ and a significant vote against the political status quo. The implications are likely to be far reaching – in both a political and economic sense.
Donald Trump’s policy priorities are expected to be:
Implications of President Trump policies
It is our view that, over time, Donald Trump’s policies would, as announced, be highly stimulatory, expansionary and, ultimately, inflationary.
In terms of implications for financial markets we see three phases for the period ahead – but with less confidence on the exact timing of these trends.
At one stage in the US (late afternoon on 9th November AEST), the S&P and NASDAQ Futures were down 5%, the maximum drop permitted by the Chicago Mercantile Exchange before trading curbs are triggered. Globally, the Japanese Nikkei closed down -5.4%, Hong Kong’s Hang Seng -2.2% and the ASX200 down 1.9%. However, once US markets opened, the ‘risk off’ sentiment quickly reversed with most equity markets closing higher.
In bond markets, much like equity markets, we saw the initial ‘risk off’ sentiment quickly reverse as US markets opened and yields rose sharply on the result, with US 10yr yields up 20bps to 2.07%. Initially Australian 10yr bonds were down 14bp to 2.21%, but in overnight futures trading yields have increased 29bps to 2.49%.
The ‘risk off’ mode was based on the view that Donald Trump is a vote for significant change in the US political system. This change will likely bring uncertainty and, as we know, markets do not like uncertainty. However it is fair to say that phase one has been shorter than expected.
If he was able to get his election policies through Congress (which could be more likely given the Republican’s majority in both the House and Senate), we are likely to see a near-term acceleration in the pace of growth of the US economy and a surge higher in the USD.
The equity markets could potentially respond positively to this stimulus – especially those with significant cash holdings off-shore and those companies involved in sectors of the US domestic economy that stand to benefit from Trump’s nationalistic policy focus.
This could be expected to see Treasury bond yields move sharply higher – short-circuiting the stronger economic data. Trumps anti-trade policies and commitment to increasing tariffs are also likely to be inflationary and negatives for growth. The implication here is that, perhaps within a year or so of President Trump’s policies being introduced, the US economy could weaken significantly (possibly head towards recession), with the USD, bond yields and the equity markets all likely to decline as well.
Source: Colonial First State Investments