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#Market Strategy — 15.11.2016

Is Trump Leading a Keynesian Economic Policy?

The first speech by President-elect Donald Trump led to investors focusing on his Keynesian stimulus measures rather than on the risks linked to protectionism.

The initial, negative reaction of the financial markets to the election victory of Mr Trump was gradually reversed after his first speech as President-elect. He adopted a completely different attitude, more in harmony with the presidential role and more conciliatory with the Democrat party. This speech avoided all the risky and difficult issues. Mrs Clinton reassured the markets by asking her sympathisers to give Mr Trump “a chance to lead”. The financial markets came to the conclusion that it was preferable to concentrate on the most likely policy rather than on all the possible scenarios.

This implies focusing on fiscal stimulus measures, i.e., tax cuts for both individuals and companies, and investments in infrastructure. This stimulus policy will spur more domestic growth but create more inflation. This stimulus could represent 3% of US GDP for 10 years, which explains the strong reaction from the bond markets.

We recommend watching the Trump administration in a few key areas: protectionist measures,  the implication of the Fed’s independence, and geopolitical issues. In the short term, two specific questions will determine the trend in the financial markets: i) Will the Fed raise interest rates (our scenario) once in December and then twice in 2017?; ii) Who will be appointed in the new administration?

The billion dollar question

The political shock of Mr Trump’s victory has so far had only one major effect on the financial markets: the US yield curve is much higher than before the election result. The 10-year US yield is 2.15%, much higher than expected.

Other financial assets, i.e. on equities (including global equities), Forex rates and gold, have remained close to previous levels. And volatility has not increased too much, as feared, with this major political change. Gold has fallen recently due to the  greenback’s strength

Fundamentals remain solid

Our optimism on risky assets is based on two main factors supported by recent satisfactory data. Firstly, leading economic indicators (overall PMI including in the emerging markets and the ISM in the US)  herald an improvement in activity: solid in services, better in industry. Our economic growth forecasts remain unchanged, and if we had to make revisions post-US elections, they would be to the upside.

On the other hand, the earnings season is satisfactory in both the US and Europe. In the US, the rise in profits has returned after 5 quarters of consecutive declines (particularly in the oil sector). In Europe, positive surprises dominate and there is even some good news on sales figures.

The political risk turns to Europe

In Europe, the next political event is the Italian referendum (4 December); the “No” seems to be the favourite, and in such case, Renzi’s government might be forced to resign. But it is likely that a general election will be avoided by re-forming a new Renzi government.

The markets will then focus on the general election in the Netherlands on 15 March, the presidential election in France (May 2017), and then the general election in Germany in autumn 2017.

Other events to watch are the UK budget which will be presented by the new Chancellor of the Exchequer on 23 November.

After the vote in favour of Brexit, but before the negotiation phase with the European Union starts (scheduled for March), the British authorities might be the first to launch this new “Policy Mix” to offset the negative impact of difficult EU talks on the economy.


For further analysis and conclusions, please check our app Voice of Wealth