US election implications for the euro area – Deutsche Bank

Research Team at Deutsche Bank, suggests that their preliminary view is that the policies championed by Trump during the presidential campaign are likely to weigh on the already challenging euro-area outlook.

Key Quotes

“Trump’s election is likely to be a negative development for trade agreements and the likelihood of a pick-up in global trade. That said, it may be premature to envisage dramatic changes in existing trading relationships. Where a Trump Presidency could cause more disruption is in ongoing and future trade negotiations such as the TPP and TTIP, which have been years in the making in any case.”

“Private investment spending could be negatively affected in an already highly uncertain political outlook. In our view, there are significant uncertainties attached to Trump’s policies. Political and macro uncertainty tends to lead to a postponement of investment decisions.”

“According to Deutsche Bank’s European equity strategists, a rise in Trump-related policy uncertainty would weigh on European equities with a downside risk for the EuroStoxx600 of 5-10%. Over the past 10 months, stress episodes, from China to Brexit, have weighed on the banking sector, particularly in Italy regardless of the direct contagion channels.”

“The uncertainty associated with the policy outlook for the US economy could push the EUR up in the short-term. The usual negative correlation of the euro with US equities is one reason for a EUR/USD rally on the back of a Trump victory near term. In the medium-run, the effect is ambiguous.”

“The above financial developments could partially hinder the transmission of the ECB’s monetary policy. Furthermore, following Brexit and a Trump’s victory, we expect increasing apprehension about the various political events coming up in Europe over the next twelve months. This uncertainty will constrain the euro-area recovery, underscore our expectation for a slowdown in euro-area 2017 GDP growth and further complicate the ECB’s task.”