November 15, 2016

Pegler’s market report – 15.11.16: The Trump Effect

by David Pegler

in Insights Press Releases

As published in the Brighton Argus (15.11.16) Business on page 21 under the title Pegler’s Market Report:

The Trump Effect

Investors endured a rollercoaster ride after the shock election of Donald Trump as the next US President sparked a bout of extraordinary volatility that agitated financial markets around the world. Shares and bonds whipsawed violently as initial concerns about a Trump presidency gave way to cautious optimism that the businessman turned politician would be less disruptive than originally feared. Thereafter the Trump aftershocks caused some wobbles in emerging markets, the US dollar rose and bond yields surged.

US economic growth prospects appear strong enough for the Federal Reserve to proceed with a gradual increase in interest rates, Fed Vice Chair Stanley Fischer said on Friday in his first remarks since the election of Republican Donald Trump as US President.

During his acceptance speech, Trump struck a conciliatory tone reiterating his commitment to increase infrastructure spend prompting investors to shift their focus to his policy priorities, which also include tax cuts, roll back regulatory scrutiny in the banking sector, and upping defence spending. But fears of Trump’s protectionist policies, such as slapping punitive tariffs on exports for countries such as China, sparked a sharp sell-off in technology stocks. Trump has also been critical of the companies in the technology sector who hire skilled foreign workers.

The bond markets are where investors have seen the biggest relative moves since Trump’s shock victory. Bond yields have surged over fears of inflation, which resulted in prices falling sharply – industry commentators coining the phrase of ‘Trumpflation’. The Mexican Peso also slumped to record lows on fears of previous Trump campaign talk about rewriting or scrapping the North American Free Trade Agreement and building a wall along the border of Mexico.

Trump’s election has sent oil prices back, and rallied the prices of metal such as copper. There is speculation about increased US oil output as the new president-elect has previously said he would de-regulate fossil fuel production. Meanwhile copper soared as infrastructure spending was highlighted as a key pledge in Trump’s victory speech.

The Trump victory provides tail wind for anti-establishment votes across Europe. Investors are likely to shift their focus to upcoming political events in Europe – elections and referendums due to be held in the next 12 months (Italy, Netherlands, France, and Germany).

Meanwhile, back on home soil, some strategists believe the Trump victory could lead to a softer outcome for Brexit. The argument goes that it could lead to an improvement of the UK’s negotiating position when dealing with the EU, with the UK now at “the front of the queue” with the US in trade talks.

By David Pegler, Brighton Capital Management