US Election Special

US Election Special - How have the markets reacted to President Trump?

Nobody is really clear yet as to Trump’s exact policies and whether announcements made during the election campaign will result in firm policy-making. Fiscal easing may come through in the shape of tax cuts, targeted at low-spending consumers. US  10-year Treasury yields hit a 10-month high on inflationary concerns and how tax cuts and an increase in spending would be funded. If tax cuts were introduced in full, it would push the US debt-to-GDP ratios to levels that are already making the credit ratings agencies nervous and Fitch has already issued a warning as to the potential consequences for the US credit rating. US equities moved up on hopes that Trump will introduce a pro-business agenda. One suggested favourable tax change could allow US companies to repatriate cash held overseas back to the US supporting share buy-backs or takeover activity.

What will the US Fed decide to do on interest rates in December? US interest rate futures showed the chances of a rate hike in December dropping from 84% to 50% before rebounding to 82%. Donald Trump has commented openly about replacing US Fed Chair Janet Yellen with someone more ‘hawkish’. Trump intends to shift from monetary to fiscal stimulus, with the infrastructure investment programme. However, as Theresa May has discovered in the UK, when you have got a lot of debt and want to increase it further to fund investment it helps if the central bank is onside. Any government that goes on a spending spree needs the central bank to buy bonds to ensure funding costs don’t rise too high and become prohibitive.

Donald Trump is likely to increase defence spending but has a negative view of NATO and a seemingly cordial relationship with Russian President Putin. What implications this has for the Ukraine and other parts of Eastern Europe remains to be seen.

It is early days and while a smooth transition of power would be welcome in the USA, markets are likely to remain volatile over the coming weeks as they deal with the ongoing uncertainty. Given the acrimony within the Republican Party surrounding Mr Trump’s candidacy, a huge amount of bridge building will be required if any of his plans are to come to fruition. He takes office on January 20th and investors will be looking for more detail ahead of this date.

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