Very little in the tank. Just quick paste before I have to log back off and rest.
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Iso
<Trump triumphs
09Nov 16 Lucy O’Carroll
Chief Economist, Aberdeen Solutions
He promised us “Brexit plus plus plus,” and that’s what he delivered on the night. Against the polling, against the betting odds and against market sentiment in the immediate run-up to the elections, Donald Trump will be sworn in as the U.S. president in January 2017. He will also have the backing of a Republican Congress, giving him far greater policy scope than his predecessor. So what are the immediate implications for the economy, policy and financial markets, and how might things look over the longer term?
A predictable short-term response from markets: We have seen a move into safe havens overnight, with the Japanese yen and gold up sharply. At the same time, assets most closely associated with some of Trump’s more anti-globalization and protectionist views have been selling off, with the Mexican peso in the lead. The question is, how long might this globalized risk-off move last? After all, if we take Brexit as our template – and there are similarities, in both the nature of the insurgent vote and the fact that the result won’t be “implemented” until Trump takes office next year – then the answer could be “not long.”
More clarity in three areas – monetary policy, fiscal policy and the extent of any "de-globalization" moves – is required.
However, the U.S. economy’s role in the world economy and markets means this outcome is a more globalized one. Therefore, markets will be looking for more detail and consistency of message in the run-up to his inauguration next January than Mr. Trump has so far offered. Specifically, more clarity in three areas – monetary policy, fiscal policy and the extent of any “de-globalization” moves – is required. On the basis that he rises to this challenge, we would expect calm to be restored over the days and weeks ahead.
Taking monetary policy first, a Trump presidency has important implications for U.S. interest rates, potentially in both directions. All bets on a U.S. rate rise in December are off. The U.S. Federal Reserve (Fed) looks set to remain in stimulus mode until there is greater clarity on the longer-term economic and market implications of a Trump presidency. There are, however, forces potentially pushing interest rates in the other direction. For one, Mr. Trump’s criticisms of the effects of the Fed’s loose policy stance suggest that he may appoint “hawks” to the two empty posts on the Fed’s rate-setting committee. And Fed Chair Yellen may either be pushed or jump earlier than her January 2018 exit date. In addition, the introduction of trade tariffs and immigration controls – see below – could damage the U.S. economy’s long-term growth prospects, with potential inflationary consequences.
On the fiscal side, Mr. Trump also has some clarifying to do. During campaigning, Mr. Trump has made two key commitments: tax cuts of up to $10 trillion and an increase in infrastructure spending. Both could be scaled back, though a move to greater reliance on fiscal rather than monetary policy would fit with the prevailing mood among international institutions and many investors. On the other hand, if Mr. Trump does not take the opportunity to tone down his campaign musings on the possible writing down of U.S. overseas debt obligations, the risk premia on U.S. assets could rise, particularly if combined with worries about political interference with the workings of the Fed.
And then there is the issue of “de-globalization.” Severely restricting immigration, increasing trade tariffs and tearing up free-trade agreements could have substantial negative effects on current and potential future U.S. growth. However, the magnitude will depend on how far the reality matches up to the campaign rhetoric. A “soft” Trump scenario could involve the introduction of 10%-15% tariffs on Chinese and Mexican goods, matched by retaliatory tariffs on U.S. exports to those economies. If this is combined with an increase in the deportation of illegal immigrants and a temporary confidence shock, we would anticipate a slowdown in the U.S. economy as domestic demand weakens. In a “hard” Trump scenario, tariffs would be higher and geographically more widespread, alongside a larger deportation push. The combination of heightened uncertainty, faltering exports, rising consumer price inflation and slower population growth would drag U.S. gross domestic product (GDP) growth down more sharply than in the “soft” scenario and would also have more negative, and more widespread, implications for the U.S.’s trading partners.
The detail and tone of announcements in the weeks ahead will be crucial.
On the evidence so far, Mr. Trump is striking a more conciliatory tone than during his campaign. On this basis, we might lean towards a “soft” Trump outcome for now, but the detail and tone of announcements in the weeks ahead will be crucial. There are also a host of other questions that are less immediately in the markets’ focus, but are nonetheless important. What about the U.S.’s role in North Atlantic Treaty Organization (NATO) and its relations with countries normally less favored by the West (such as Russia)? What about the country’s own internal politics – what does this result say about the state of the two establishment parties and the views of the voting public?
Turning to the market implications, the policies of Mr. Trump are not yet clear, and so the prospects for both monetary and fiscal policy in the United States have rarely been more uncertain. A rise in certain risk premiums is therefore not a surprise. More certainty in the weeks and months ahead is likely to be welcomed by markets.
Investors are likely also to take a keen interest in the relationship between Mr. Trump and the Fed. Investors have confidence in Janet Yellen and the institution she chairs. Further attacks on the integrity and structure of the Fed are likely to be unhelpful to markets.
While weakness in riskier assets globally is what we might have expected given today’s news, the outlook for two of the world’s most important assets is more nuanced. Both the dollar and U.S. Treasuries will balance an increase in perceived risk and the potential increase in inflation, against the prospects for lower growth and lower policy interest rates in the short term. Their respective paths will be important in setting the direction of all assets in the months ahead.
However, amid the many uncertainties that abound today, it is worth remembering that the United States remains a country where the rule of law is sacrosanct, where the demographics are relatively favorable and where there are broad and deep pools of capital. None of these fundamental features have changed as a result of events overnight. This was the case yesterday. It remains so today. For long-term investors, factors such as these will continue to be the ones that drive returns.
We entered the U.S. election period with balanced portfolios that were using a limited amount of the risk budget available to us. This felt appropriate, and continues to be so.
Important Information International investing entails special risk considerations, including currency fluctuations, lower liquidity, economic and political risks, and differences in accounting methods; these risks are generally heightened for emerging market investments. Concentrating investments in the Asia-Pacific region subjects the Fund to more volatility and greater risk of loss than geographically diverse funds. Fixed income securities are subject to certain risks including, but not limited to: interest rate (changes in interest rates may cause a decline in the market value of an investment), credit (changes in the financial condition of the issuer, borrower, counterparty, or underlying collateral), prepayment (debt issuers may repay or refinance their loans or obligations earlier than anticipated), and extension (principal repayments may not occur as quickly as anticipated, causing the expected maturity of a security to increase).>
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