A Trump card in the US deck

Can President Trump do much harm to the US economy? In one of many departures from Republican orthodoxy, Donald Trump campaigned on a plan to rebuild US infrastructure, and with Congress and President belonging to the same party, he could be in a position to deliver the fiscal stimulus he promised and encourage the repatriation at least some of the US$2.1tn belonging to US companies abroad.

What we know of his programme so far is remarkably favourable for the US equity market, although his foreign policy ambitions and opposition to free trade are less positive internationally, particularly for the emerging world. Mr Trump made it very clear during his campaign that he did not view the influence of China as benign for the global economy, and his negative views on Mexico and even Canada to some extent have been well reported. The dominant theme in markets right now is continued uncertainty. With Brexit, we have a longer timeline and the potential for a range of different outcomes. Mr Trump’s actions will have consequences much sooner as he looks for the support of Congress to implement his agenda. With the Republican camp divided, there is a good chance that his most extreme ideas will come to a grinding halt on the floor of Congress and never see the light of day. But who knows? With Mr Trump, America has drifted into political terra incognita, and this will keep weighing on markets’ assessment of risks. The charts opposite show how financial assets performed around the time of the FBI’s investigations into Hillary Clinton’s use of a private server, which boosted Mr Trump’s polling and may be the best parallel to today. Bonds showed limited upside, while gold and volatility rose sharply. The US dollar lost ground against G7 currencies but gained a little against emerging currencies, especially the Mexican peso.

Equity markets were generally weaker, especially higher-beta markets such as Europe and Japan. This is exactly the same pattern we saw after Brexit and is likely to persist until the dust has settled.

In the longer term, fiscal stimulus should support US equities, particularly energy and domestically-oriented companies, but work against bonds. This, combined with the prospect of repatriation of US dollar assets should be supportive of the currency, while emerging economies are likely to bear the brunt of the expected shift in US foreign policy.