Trump won: what next?
The unthinkable has happened again and Donald Trump will be the next president of the United States. As the probability of the US presidency going to Trump became more certain, financial markets reacted violently.
Mexico, which was threatened with a physical wall bordering its main trading partner, saw its currency fall to an all-time low with the dollar. Meanwhile US equity futures also hit maximum limits in early trading. Gold and safe-haven assets initially soared.
However, following the knee-jerk reaction to Trump's victory, markets rallied aggressively; eventually the benchmark S&P 500 index opened less than one per cent to the negative.
The three main policy arguments that have shaped Trump’s campaign were an increase in fiscal policy, rebalancing of trade agreements and immigration controls:
The message that Trump sent during the campaign hints at an expansionary fiscal policy. A large fiscal stimulus of around 3% per cent appears to be favoured by President Trump.
Seen in isolation, such a plan would boost euro-area imports and thus be supportive to German stocks, especially cars. However, potential restrictions on trade and the impact of protectionist policies on other trading parties would depress any benefits.
Most of the pre-election rhetoric centred around immigration and trade. If Trump sticks to his word, the election result will be negative for international trade. It could spell the end for negotiation on the TPP (Trans Pacific Partnership) and the TTIP (Transatlantic Trade and Investment Partnership). There is a possibility that even NAFTA (North American Free Trade Agreement) may come under discussion.
The promise of immigration controls probably contributes to Trump's victory as much as anything else. The famous promise to build a wall between the US and Mexico highlights his pre-election stance.
Lately, it seems to be impossible to be elected or win a referendum by making the usual promises. It is also highly likely that he will not implement what he said. Yesterday’s acceptance speech has already painted a more moderate, reconciliatory stance. I do not subscribe the storyline that a Trump victory is an 'end of the world as we know it’ scenario; not because I support any of his hardline policies, but because adhering to the rhetoric would be too expensive for the US economy.
It does not make sense to go for expansionary fiscal policies only to lose the benefits with policies that are anti-immigration or anti-trade; while the US president may have promoted these ideas during his pre-election campaign, the historically pro-market Republican party will probably continue to oppose such ideas.
It is also not clear how the US can, in practice, build a physical wall with Mexico, legally break signed trade agreements and offset trade imbalances without retaliation.
What will probably shape financial markets in the short-term will be the uncertainty that surrounds the future US policy. The economic implications of Trump's election will be better understood once he organises his policy team, especially his treasury secretary. The government’s relation with the Federal Reserve will also be a point of focus.
Over the longer-term, any attempt to implement hardline promises will have significant negative impacts on financial market. However, this scenario is ‘probably’ improbable, and markets, sniffing a chance of a party, are soaring. In this environment, rather large price movements become opportunities to buy that share that yesterday was too expensive.
This article was issued by Antoine Briffa, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.