US: The Trump rally in perspective - AmpGFX

Greg Gibbs, Director at Amplifying Global FX Capital, notes that the rise in optimism following the Trump election in the USA has seen US rates yields, the USD exchange rate, and the stock market rally significantly. 

Key Quotes

“This may reflect some pent-up momentum that was awaiting the conclusion of the hard-fought divisive election campaign that distracted attention away from investment, hiring and spending.  It may also reflect the hope that a Republican-led Congress and administration can get things done.  It may reflect the sense that a Republican government, the traditional party of capitalists, will make policy that benefits business.”

“Industrial commodity prices, outside of oil, have surged in part due to the overtures Trump has made to boosting infrastructure spending.  This drew more attention to a trend in more infrastructure spending begun or planned in many other parts of the world. China has boosted infrastructure spending this year to underpin economic growth and continues to pursue a far-reaching policy of promoting infrastructure spending across regions with its One Belt One Road (OBOR) new Silk Road policy and its lead role in setting up the Asia Infrastructure Investment Bank (AIIB).”

“Rising commodity prices have added to reasons for global yields to rise, helping boost inflation expectations.”

“Yields have risen also because of a push-back against central banks’ negative interest rate and quantitative monetary policies.  These policies persist and restrain the rise in yields, but the market had gone too far in fearing the extension of these policies even as they appeared to be counter-productive by hurting financial sector companies and households relying on interest income while undermining economic confidence and inflation expectations.  The market may be now seeing the benefits of these policies more clearly in a rising yield environment, by keeping real yields low and foreign exchange rates cheap, providing support for investment spending.”

“Yields may be rising in the US as evidence of wage growth has shown up more clearly, combined with low unemployment.  The outlook for economic growth has improved, supporting further tightening in the labor market.”

“Yields may be rising in the USA due to risks that the Trump policies, including more infrastructure spending and tax cuts, may halt and reverse narrowing in government fiscal deficits at the Federal, State, and local level.”