The markets have second thoughts on Donald Trump
Jan 24th 2017, 14:10 BY BUTTONWOOD
MARKETS are always full of surprises. In the run-up to the Presidential election, many investors were nervous about the possibility of a Trump victory. But on the night of the results, there was a dramatic turnaround. Within a few weeks, the market capitalisation of global equities had risen by $3trn and that of government bonds had fallen by the same amount. Markets were betting on “Trump lite”—that his tax cuts and infrastructure spending would be pushed through boosting growth and possibly inflation. By contrast, they downplayed the other “Donnie Darko” element of his policies—his threats to tear up trade agreements and heighten geopolitical risk in the middle east and Asia.
So far, however, we have seen more of Donnie Darko than Trump lite. First there was his “I have a nightmare” inauguration speech with its references to “American carnage” and protection. Then there were his early actions which focused on trade (abandoning the Pacific deal known as TPP and promising to renegotiate NAFTA) and foreign affairs (talking about moving the US embassy to Jerusalem and rethinking the “one China” policy). So investors have lost some of their enthusiasm. The Dow has failed in its attempts to breach 20,000, the dollar has dropped back and the ten-year Treasury bond yield, having touched 2.6%, is back below 2.4%.
What is interesting about the business world is that there are two kinds of reactions. Corporate leaders are learning to live with Mr Trump (“normalising” him in the current jargon). It is partly necessity (his threats can do them damage) and partly genuine enthusiasm—he plans to cut both their personal and their corporate income taxes. This has happened at the big banks, which also like his plans to roll back the Dodd-Frank regulatory regime.
But there is a much greater suspicion among analysts, particularly among those who work for European banks. Indeed I can’t recall any other President being talked about in such a hostile tone. Sometimes this is short and to the point. France’s Socgen said in its morning note today
The market is awaiting more clarity on the economic policies of the new American administration. But for now, it is left to the vagaries of tweets and off-the-cuff comments in the absence of any coherent communication.
Indeed Mr Trump’s statements do not always agree with those of his appointees. Here is Peter Rosenstreich of Swissquote
the overall interpretation of recent events is that Trump’s trade policy is completely “from the hip”. Protectionist policy setting with flexible ideology makes foreign exchange trading extremely uncertain.
More seriously, the worry is that America is abandoning the economic leadership that saw it champion free markets. Here is Erik Nielsen of Unicredit, an Italian bank
I don’t think we can escape the conclusion that “the free world” has lost its leader. After all, a leader needs followers, and who’ll follow someone whose guiding principle is “me first”? To define his “America first” mantra, President Trump announced “two simple rules: Buy American and hire American”, and he promised that “America will start winning again, winning like never before”. Donald Trump’s world is principle-free and transactional. Every interaction is a zero-sum game with a winner and a loser—and the US will win “like never before”. Good luck, trade negotiators from the rest of the world…
And Jan Dehn of Ashmore, an emerging markets investment group
Revealing a shocking degree of economic illiteracy, US President Donald Trump claimed in his inaugural speech that protection will lead to great strength and prosperity”. His bleak, defensive and atypically American vision of pessimism and defeatism was a de facto abdication of America’s erstwhile role as undisputed global leader on economic issues. By contrast, Chinese President Xi Jinping’s message at Davos spelled out a positive and ambitious agenda of openness and support for globalisation with the words “protection is like locking yourself in a dark room”
From a historical point of view, this is interesting. Countries at the top of the economic tree tend to favour free trade because it works to their advantage. That was true of Britain in the late 19th century and America in the second half of the 20th. America’s retreat from the notion is a sign of lost confidence. Of course. it is impossible to argue with a straight face that China is pursuing a free trade policy, given all the restrictions it places on foreign investors and companies.
Nevertheless, the fact that China is aspiring to global leadership is significant. In the brief unipolar period of the 1990s, it was possible to believe that counties would aspire to the liberal democratic model. But China’s growth has been so strong that many countries may feel they can get prosperity without the messy democratic stuff. The Iraq war, the financial financial crisis of 2008 and now the election of the mercurial Mr Trump have not been great adverts for the American system.
In a splendid piece for the Financial Times, Gideon Rachman worries that:
If the Trump administration now destroys American credibility, it will have handed the Russian and Chinese governments a victory of historic proportions. The cold war was a battle not just about economics or military strength, but also about the truth. The Soviet Union collapsed, in the end, partly because it was too obvious that it was a regime based on lies.
None of this is going to stop the markets from rallying again when tax cuts are pushed through or if short-term growth does pick up under Mr Trump. But there is enough disquiet in the financial sector about Mr Trump’s rhetoric to suggest that markets may be easily spooked.
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