25 January 2017

Trump Bump or Trump Dump?

By any stretch of the imagination, there has been a great deal to take on board during these first few weeks o f 2017.

While there are always the Christmas trading statements to take into account, much additional stimulus has emanated from the United States as Donald Trump begins his Presidency. The good news, from my perspective anyway, is that it largely knocked the Brexit debate from the headlines, though the recent Supreme Court decision will doubtless revive coverage.

Markets generally treated the prospect of a Trump administration favourably, with the expectation that it would be business friendly and result in significant tax cuts. The so-called “Trump Bump” did wobble a bit as investors took on board that some of his plans may have consequences that are difficult to predict. True, our own FTSE 100 Share Index did make it into new high ground during January, but then sterling continued its weakness as traders stood aside until the outcome of exit discussions were more apparent.

The tearing up of one trade agreement – TPP with Pacific Rim nations – and the review of the longer standing NAFTA, which incorporates Mexico and Canada underscores Trump’s determination to restore jobs to the US. But will such measures succeed? Already China is confirming its commitment to globalisation, in contrast to Trump’s more protectionist stance, through their President’s address at Davos. But there are those that argue jobs will return to US robots, not to the blue collar workers he’s promised to support.

Meanwhile, higher inflation figures brought to mind that the Bank of England’s loose monetary policy may have to come to an end earlier than the Governor anticipated. It is not just here that inflation is on the up. In America, the Consumer Price Index has topped 2% and global CPI is also rising. Add to this the likely need of the Trump administration to borrow to fund promises and you can see why the yield on US Treasuries has expan ded from 1.5% to 2.5%. If he is seen to fail, as George Soros believes he will, the Bump could become a Dump.

Investors have been giving the uncertainties that circle markets the benefit of the doubt for a little while now. Perhaps it is the less attractive nature of the alternatives that encourage this risk-on approach. Cash still yields next to nothing, while bonds, both government and corporate, look vulnerable to rising interest rates. Share valuations are looking somewhat stretched in the US. There is still nervousness around, as witnessed by the way in which the shares of companies making profit warnings are punished. Strong earnings growth will support the current stance, but it remains a time to be watchful.

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