The knee-jerk reaction in markets was overwhelmingly negative to the 'surprise' Donald Trump US election victory. A measured and inclusive acceptance speech from the New York billionaire saw a hefty reversal in the hours following the result.
Markets have been relieved by the idea that Donald Trump’s election promises were a shrewd deception to achieve power. This idea is mistaken. Donald Trump has promised to up-end the US political establishment and to take a wrecking ball to failed economic policies. The tone and language he has used throughout his campaign is not one of a man planning to cosy up to the power elite.
Another hope in markets is that Donald Trump can usher in a more ‘pro-growth economic agenda.’ The difficulty for financial markets is that there has been an unprecedented ramp up in asset prices under the status quo; any change, even if economically positive, is likely to be a bad thing.
'The Donald' has a clear mandate from the American people to deliver on some of his promises. The establishment and globalisation are unpopular for a reason. Americans want the issues surrounding trade, immigration, Obamacare, foreign policy and taxes to be addressed.
The Republican party at its core doesn’t share the belief that many of these policies need to be changed, at least publically. One reason a Donald Trump victory doesn’t necessarily mean a sledgehammer to the established order is that the US still operates with three branches of government. Still, there has been a clear shift in the balance of power in the legislative, executive, and judicial branches of the US government. The Supreme Court is likely to lean more conservatively with Donald Trump’s future appointees, and both houses of Congress are now on the same side of the isle as the president-elect.
A new president can't enact all his promises so the big question is; which policies will Trump prioritise?
It would appear that there is no support in the US for austerity, and the budget deficit is going to widen. Donald Trump wants to simultaneously cut taxes and boost spending on infrastructure to usher in higher growth. If economic growth is achieved, tax receipts can go up and the US can cut its national debt, but that's a big ‘if’. He has suggested a one-time tax break for foreign earnings repatriation, which would be positive for US multinationals like Apple, which are hoarding foreign cash.
On the face of it, chances of a rate hike this year are slightly diminished under a Trump victory because of the uncertainty and downside risk to asset prices. If financial markets remain composed, the Federal Reserve can still go ahead with a 0.25% rate rise in December, but the next glide path could be lower.
The widespread belief that foreign trade has contributed to US jobs being shifted abroad will be an important barometer for Trump delivering on his promises. China has had a lot of finger-pointing from Trump in his campaign. There is a real risk of increased tariffs on Chinese goods and China could be labelled an FX manipulator. Trump has been a vocal opponent of trade deals like NAFTA and TTIP, though he has promised to get “better deals” rather than repeal them. This makes for a lot of wriggle room.
A less interventionist foreign policy would be welcomed by vast swaths of the world that view the US is an aggressor. Trump has questioned the US’s support for NATO members who have not “paid their share” and has proposed a closer working relationship with Russia. To reduce the role of the US as the “world’s policeman” and slash military spending would strike at the heart of the military-industrial complex and be a very difficult task.
One of the easiest targets for Donald Trump to boost flagging consumer spending, and help economic growth, would be to end Obamacare and slash climate change regulations. Moral and environmental considerations aside, the huge increase in healthcare spending and the rise in energy costs because of the closure of coal plants has been a big hit to working class families.
Immigration is one of the most heated areas of debate. Most Americans are immigrants of some form or another and believe in immigration, but Trump's victory has been a reaction against the increasingly “open borders” under Obama. The promise to build a wall on Mexico is his most famous policy. It was widely derided but has clearly resonated with the American people, and it would seem like one area Trump will have to deliver, though quite how Mexico is going to pay for it is anybody’s guess.
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