Giving the Trump’s up or down

Cheers or fears as president-elect to take office on Jan 20

THE people of the United States have spoken and he is set to take the oath of office on Jan 20.

Donald J. Trump was elected the 45th president of the United States on Tuesday in a shocking climax of a turbulent presidential campaign that took fierce shots at the foundations and long-held ideals of the American democracy.

Republicans defied expectations and retained control of both the House of Representatives and the Senate.

Actions always speaks louder than words, and a Trump victory clearly reflects the discontent among a large portion of the US population encompassing issues ranging from trade to immigration and the government.

There is legitimate and palpable fear in the Arab world, among the Muslims, Mexicans and those in the emerging world.

Financial markets-wise, investors around the world reacted in classic panic style... but all that selling resulted to naught, with the Dow Jones leading gains.

Dow Futures which were down as much as 800 points on Wednesday, ended the day and Thursday solidly higher.

Wade: ‘We are likely to see modest fiscal stimulus and a trade war.’

The US dollar is now showing a lot of strength as markets believe the Trump administration will lead to spending to boost growth, spurring inflation and a tighter monetary policy.

The yen has roughly weakened to 106.42 and gold has weakened some US$20 to US$1,279 since Nov 8. Treasuries are continuing their selloff, with US 10-year treasuries yields up 10 basis points to 2.15%.

Asia is bearing the brunt of a Trump victory though.

While Asian currencies have in general weakened, the ringgit and the Korean won are bearing the full force of it.

Uncertainty now rules with the increased risk to trade given the possibility of more US protectionist policies and a dollar that may continue to rise. This isn’t likely to abate until Trump takes oath on Jan 20.

What lies ahead?

Donald Trump has won the US presidential election, and the Republican party has retained control of both houses of Congress – the Senate and the House of Representatives. Risk aversion is dominating the initial market reaction, with developed-market bond yields and major equity indices all declining.

“Congratulations to Donald Trump who has defied the odds and the naysayers to become the oldest elected president of the US. This is an extraordinary achievement for a Washington outsider who had to beat 16 others for the Republican nomination, as well as a seasoned politician like Hillary Clinton for the presidency. Meanwhile, commiserations to Hillary for whom the election was hers to lose. And spare a thought for the opinion pollsters whose reputations lie in tatters,” says Schroders chief economist and strategist Keith Wade during a conference call with the media following Trump’s win.

Wade says investors must now absorb the reality of a president who has promised to create 25 million jobs and build a wall across the border with Mexico.

It is still early days for what a Trump administration could be like. Analysts and observers note that Trump’s rhetoric during campaign speeches should not be taken too seriously. Thus for the short term, brace for a volatile ride as investors over-analyse every single comment Trump makes and try to make sense of how it affects US policies.

“Trump – A New World Order” – this was the headline of Standard Chartered’s senior economist, global political analyst Philippe Dauba-Pantanacce.

Dauba-Pantanacce highlights that a Trump presidency potentially exacerbates one of the most complex foreign policy landscapes in decades, as he has questioned the basis of post-war global security arrangements in which the US has a central role.

Trump’s policy could ultimately be less disruptive than announced but in the short term, nervousness will prevail.

“The most notable foreign policy campaign statements were a suggestion that key US allies in Asia such as Japan and South Korea, should develop their own military response capacity, including nuclear arsenals. This undermines decades of official denuclearisation stance, questioning the US commitment to Nato, supporting the view that US costs in these alliances exceed its returns, and hinting at a much closer relationship with Russian President Vladimir Putin,” says Dauba-Pantanacce.

UBS Asset Management head of Asia Pacific fixed income Hayden Briscoe says that in the near term, Trump’s comments will be closely watched as it will give an indication of the direction of the policies he intends to put through versus what has been said during the campaign.

Briscoe: ‘The US Treasury yield curve steepened as a result of a rise in long-term yields.’

“This will be most important for Asia in relation to trade. Market reaction has so far been muted, in particular, compared to Brexit. We saw a small widening in Asian credit spreads. The US Treasury yield curve steepened as a result of a rise in long term yields. This could be partly explained by the fact that Republicans, who now control Congress, will be able to put through fiscal policies and infrastructure spending. Hence, this could mean higher deficits and inflation and more bond supply,” says Briscoe.

Briscoe continues to think that the Fed is likely to increase interest rates in December.

Strategy wise and within his portfolios, Briscoe says UBS has already been reducing risks for some time, and is adopting a defensive stance.

“We are underweight credit and favor high quality and liquid names. We also hold high cash levels and we would look to take advantage of any significant market weakness to add risk,” he says.

Uncertainty in monetary policies and flows

Meanwhile, UBS Asset Management senior equity specialist, global emerging markets and Asia Pacific equities Projit Chatterjee says the Trump victory is likely to lead to more uncertainty about US monetary, trade and foreign policies, especially given his rhetoric on protectionism and anti-globalisation.

“However, the important point is that there is a big difference between rhetoric and reality, and what finally gets implemented. And this makes the medium to long-term impact of a Trump victory difficult to predict,” he says.

There are a few combination of scenarios that Projit foresees.

One is that equity risk premiums are raised and equity market valuations are depressed.

Flows into Asia could be negatively impacted while there could be negative sentiment on countries and companies with substantial exports to the US.

Projit: ‘There is a big difference between rhetoric and reality, and what finally gets implemented.

He said President Trump’s fiscal policies will cut taxes and spending, but will most likely lead to higher interest rates, inflation and a bigger budget deficit.

This points to a stronger dollar and a tighter monetary policy.

Wade, however, expects Congress to temper the new president’s fiscal plans, while he will have more freedom in trade.

“Consequently, we are likely to see modest fiscal stimulus and a trade war break out as the president raises tariffs on China and Mexico,” says Wade.

He adds that the net effect is that after a brief boost from tax cuts, the economy will cool as inflation and interest rates rise. With higher tariffs pushing up prices and wages rising as immigrant labour supply falls, the overall outcome is likely to be stagflation, for example weaker growth and higher inflation.

Volatility in the short term

With volatility likely as a low rate environment unwinds, Wade says this is unlikely to be favourable for markets. Bond yields may rise as investors seek greater compensation for inflation risk, while equity markets are expected to de-rate.

“We are likely to see significant volatility as the low rate environment of recent years, which has supported equity valuations and driven the ‘bond proxy’ stocks, unwinds dramatically,” he says.

Nonetheless, cuts in corporate tax rates will offset some of these and sectors such as energy and financials could benefit from reduced regulation.

More broadly, the prospect of protectionism and lower global growth will hit equity markets and risk assets worldwide. Emerging markets are particularly vulnerable given their dependence on global trade.

Although safe havens are in demand, the dollar outlook remains uncertain.

“Some see a stronger currency driven by higher yields, but as this will be accompanied by higher inflation such a conclusion is not obvious. In addition, many investors may be deterred by a deterioration in US foreign relations with the rest of the world. The best bet is that safe haven currencies such as the Japanese yen and Swiss franc are likely to be in demand and investors are also likely to favour gold,” says Wade.