Can’t investors see that the next US president is completely untested in office, is an economic isolationist and a geopolitical accident waiting to happen? Apparently not. Or, rather, the investment world decided such worries can wait for another day.
The election of Donald Trump provoked only brief panic. The Nikkei index in Japan, a real-time barometer as results from the US states arrived, fell 5%, but European markets were calm, relative to expectations. The FTSE 100 index, after a brief plunge, regained all the ground lost in the first hour of trading. The US dollar was broadly stable against major currencies, as was the US Treasury market.
There are several possible factors at work. First, even under a president who has never held elected office, dollar-denominated assets remain investors’ first choice as a safe port in a storm. Where else would the money go? China is at risk of trade tariffs under Trump. Japan is a land of no growth with an overvalued currency. The eurozone now faces its own political uncertainties in the form of an Italian referendum in December and elections next year in France, Germany and the Netherlands. After Brexit and Trump, the European continent’s establishment could be the next to feel the heat; if so, prepare for the next euro crisis.
Second, the first economic impact of a Trump presidency could be a mini-boom in the US. He has promised massive tax cuts and higher spending on defence and infrastructure. He may struggle to convince a hawkish Congress, even a Republican-dominated one, that it is affordable to slash the rate of business tax from 35% to 15%. But one has to believe that some version of the tax-cutting agenda will be enacted, bolstering short-term consumption and growth in the US.
Third, Trump dropped some of the rabble-rousing rhetoric in his acceptance speech. His words were anodyne. He didn’t mention trade tariffs, a wall along the Mexican border or deportations. There was encouragement for those who believe Trump in office will be a different beast from the candidate who saw gains in making outlandish statements.
Can the calm last? Surely not. The apparent enthusiasm for a “reflation trade” under a tax-cutting, free-spending Trump will be tested sooner or later. Risks are everywhere. Even a watered-down version of the promised trade tariffs would bring huge uncertainties, not least the possibility of sharp devaluation in the Chinese yuan, a prospect that was supposedly terrifying for financial markets at the start of the year.
For those who believe 45% tariffs on Chinese goods, and 35% on Mexican ones, could never happen, Neil Williams, chief economist at fund managers Hermes, makes a useful point. “Super 301” powers under the 1974 Trade Act allow the president to impose tariffs without congressional approval on countries deemed to be engaged in “unfair” trade practices.
Meanwhile, Janet Yellen, the market-friendly chair of the Federal Reserve, could be defenestrated and nobody yet knows the makeup of the supporting cast around Trump.
The biggest danger, of course, remains foreign policy. Investors have been strangely happy to ignore geopolitical risks for years, but a US president who is vague about his commitment to Nato at a time of Russian expansionism is something entirely new and dangerous.
Such financial risks can’t be modelled neatly in an investor’s spreadsheet of corporate earnings but their potential to overturn investment assumptions is real. For the time being, financial markets can shrug their shoulders at the arrival of President Trump and pretend he is a blank page. The complacency will not last.
