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President Trump and Financial Markets

We take a look at possible financial market trends now that the US is coming to terms with a Presidential term for Donald Trump.

  • The election of President Trump is expected to see three phases for financial markets in the period ahead – although we have less confidence on the exact timing of these trends.


    The first phase, and indeed the initial market reaction was ‘risk off’. With equities and bond yields down and USD weakness. 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.


    The second phase of the market reaction, which appears to have begun sooner than we anticipated, is likely to be ‘risk on’, with positive sentiment towards equities and weakness in bonds. This is based on the view, as already mentioned, that Donald Trump’s policies are very stimulatory, expansionary and inflationary.


    We expect the market to switch between phase one and two over the coming months as we come to terms with what to expect from a Trump presidency.


    Phase three of the response to President Trump’s policies are, not likely to be as supportive. The key issue here, in our view, is that the inflationary implications of Trump’s policies are likely to see the Federal Reserve raise interest rates much more aggressively than currently priced into markets as inflation takes hold. 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.


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