US: Risk aversion fades rapidly but lots of uncertainty prevails - MUFG

Derek Halpenny, European Head of GMR at MUFG, notes that the much anticipated ‘risk-off’ financial market response to the shock election victory by Donald Trump was fleeting indeed with the S&P 500 market swinging from a 5% drop in early Asian futures market trading to close last night up 1.1%.

Key Quotes

“While there was always a potential positive growth story attached to a Trump presidency, it is surprising to have seen such a sharp turnaround in the markets. The markets have very little to go on at present and therefore the conciliatory acceptance speech by Donald Trump helped determine market sentiment for now.”

“We do believe there is certainly a logic to markets assumption that in the early part of his presidency President-elect Trump may well focus on implementing aggressive tax cuts and some degree of infrastructural spending. As we stated here yesterday, this is not a Republican ‘clean sweep’ in the traditional sense of that phrase given Trump is not a Republican and has divided the party so significantly. There would be no better way to rally the Republican Party than through notable tax reform.”

“While that focus helps build a reflation story for the US economy, thus lifting yields and the US dollar, we doubt this market move will be sustained with swings back and forth inevitable. Countering the tax stimulus reflation story that would be positive for the dollar are the concerns over how active Trump would be in pushing many of his other more divisive policies he espoused during election campaigning. How aggressive Trump moves on policies related to trade and immigration will be key to determining the sustainability of the optimism related to rising yields and a stronger dollar.”

“We should also not assume Trump will necessarily be constrained by a Republican Congress on his more unpopular ideas. President Obama leant increasingly on Executive Orders to get around Congressional gridlock and President-elect Trump will also be able to use Executive Orders if required. Slapping tariffs on countries that are interpreted as conducting unfair trading practices can be done, just like George Bush did with steel from China in 2002. Trump could bar immigrants from certain countries if the entrance of those immigrants is deemed as not being in the interest of the United States just as Ronald Reagan did in 1981 and Trump could act without Congress in removing illegal immigrants with a criminal record.”

“In terms of Trump’s interaction with Congress we should also remember a big part of his campaigning involved action against the “Washington elite” and Trump has promised to introduce terms limits on all members of Congress, introduce a 5-year ban on White House and Congressional officials from taking up roles as lobbyists after leaving government. He also promised to introduce a hiring freeze on all federal employees.”