Initial reactions to the US election
After a bitter campaign Donald Trump has been confirmed as the next US president. In the short term markets have reacted negatively, with risk aversion coming to the fore. Global stock markets have fallen, bonds and gold have benefitted. The Dollar has suffered and the safe haven currencies of the Swiss Franc and Yen are up this morning. The Mexican Peso dropped by over 10% against the Dollar in early trading.
Trump’s somewhat unspecific economic policies are, at the margin, more inflationary than either Clinton’s far more detailed regime or the current Obama regime. As a consequence, in the medium term you might expect higher interest rates and bond yields, higher inflation and a greater budget deficit.
However, there are many uncertainties. Some of the policies seem contradictory; for example infrastructure spending alongside spending and tax cuts. Trade is the biggest unknown and where Trump has been most outspoken. Mexico has been singled out for special rhetoric, but his policies towards China are more important in a global context, where he may decide to use tariffs or to reopen discussions about currency manipulation through the World Trade Organisation. It is worth remembering that as President he has much greater autonomy over international than domestic issues because of the US political system. A less open trade position could have a detrimental impact on Asian and emerging markets in the medium term
Monetary policy is now back in focus. The next rate rise in the US was expected in December, but is in doubt. The US economy still justifies tightening, but this uncertainty may provide an excuse for inaction. From an US economic perspective it would not be unlikely to see a short term dip in confidence indicators such as purchasing managers and consumer surveys, but we believe that this is likely to be more temporary in nature, given the experience seen post the EU referendum and previous reactions to political events.
From a political point of view, although the expected that the Republicans will have control of both the houses, President Trump will need to manage the internal tensions between the three main factions within the his own party – the pro trade group, the Tea Party and the Trump supporters, and that is before he has to deal with any filibustering from the Democrats. This will require very skilful political and party management in Washington and the onus will rest upon Vice President Elect Pence and Speaker Paul Ryan. This potential political manoeuvring will highlight the difference between the rhetoric of campaigning and reality of government.
Looking forward, this confirms the anti-establishment theme seen across western economies, and with a number of upcoming elections in Europe the risk remains high for further volatility in markets. The political response to this movement is more likely to be through government spending rather than further extraordinary monetary policy measures.
Over the past year we have progressively been reducing risk in portfolios where appropriate, taking advantage of strong markets and where possible diversifying to reflect the uncertain economic and political environment. The implications of this result and the expected ongoing volatility reaffirms our belief in a diversified approach, favouring active management over passive market participation to effectively navigate the stormy waters on behalf of our charity clients.
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