Trump dips his toe in the swamp

It’s been a Trumper-thumper of a couple of days in markets. The Trump dump was quickly followed by the Trump jump and now it seems we’re headed into the Trump slump.

It’s been a Trumper-thumper of a couple of days in markets. The Trump dump was quickly followed by the Trump jump and now it seems we’re headed into the Trump slump.

With a thin economic calendar on what is Remembrance Day for a number of countries, and as the post-election excitement dies down at the end of the week, volatility should begin to normalise. On Friday, European markets look set for a positive open.

The huge turnaround in sentiment, characterised by a record high for the Dow Jones Industrial Average is showing signs of creaking. Europe was unable to sustain the euphoria on Thursday with a mostly lower finish. The FTSE 100 stumbled, falling over 1%. The huge gains in the British pound coupled with some weakness in the price of oil proved enough unwind the positive sentiment towards UK stocks.

The creaks were on display in the US too. The Nasdaq briefly dropped over 2% on Thursday, led lower by less demand for big technology stocks. The FANG grouping – Facebook, Amazon, Netflix and Google all turned lower. It’s not that technology necessarily suffers under a Trump presidency; it just won’t be a direct recipient of any large infrastructure spending or import tariffs.

The British pound as a top FX gainer this week bucks the trend of Brexit-induced weakness seen over the past few months. There’s an element of simply a shift in focus behind this. The phenomenon of Donald Trump as US president-elect has put Brexit on the back-burner, allowing the pound to creep higher.

The direct implications of a Trump presidency on the UK’s trade negotiations with the EU can be spun either way to suit your narrative. The EU arguably will need the UK’s support in defence a bit more in a more uncertain world, though Donald Trump is probably less of a foreign policy hawk than Hillary Clinton. EU bureaucrats will also want to try and discourage the kind of populism that created Brexit and Trump within its own states with an unbeneficial deal for the UK. A bad deal for the UK is self-defeating for the EU economically, but serves a political purpose of trying to stop its own eventual break-up.

It has been UK gilts that suffered the brunt of the bond-market sell-off that also affected US Treasuries and German bunds. The rise in Inflation expectations that began before the election appears to be being exacerbated by possible Trump policies of higher tariffs and borrowing for infrastructure spending.

Whether many of these Trump-linked trends continue will depend on who he picks for the key positions in his administration. The rumoured selection of JP Morgan’s Jamie Dimon as Treasury Secretary would symbolise a desire to bring in experienced hands, and would be welcomed by markets. Dimon is also the epitome of the establishment so having him as a partner would be a knife in the back to any supporters hoping for Trump to “drain the swap.”

Equity market calls

FTSE100: to open 18 points higher at 6,845

DAX: to open 72 points higher at 10,702

CAC40: to open 26 points higher at 4,556

 

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