Global markets ambivalent on Brexit and Trump’s presidency
If one thing has been patently clear over the last few weeks, it’s that financial markets remain deeply ambivalent about what’s in store for the UK and US economies
What do international investors really make of Britain’s exit from the European Union (EU), or “Brexit,” and the ascendancy of Donald Trump to the US presidency?
If one thing has been patently clear over the last few weeks, it is that financial markets remain deeply ambivalent about what is in store for the UK and US economies, to say nothing about the political and geopolitical ramifications of last year’s twin electoral shocks.
That there is no clear-cut consensus about the consequences of Brexit and a Trump presidency - two developments which not only were viewed as highly improbable by most investors but were expected to be hugely detrimental to markets - has been the most striking feature of sentiment over the past several months.
While markets behave in strange ways at the best of times, the reaction to Brexit and Trump’s triumph has been baffling and has exposed deep contradictions in market psychology.
In the case of Brexit, the pound’s 17 per cent plunge against the US dollar on June 23 gave way to its best one-day gain in more than eight years last Tuesday. The sterling rose 3 per cent against the greenback in the face of a frank admission from British premier Theresa May that the UK will no longer remain part of the EU’s Single Market, the tariff-free trading bloc based on the free movement of goods people, services and capital.
Sterling’s rebound is perplexing given that it was the fear of Britain no longer retaining privileged access to the single market - a so-called “hard” Brexit since roughly half the UK’s trade is with the EU while the London-based financial sector accounts for a quarter of all EU financial services income - that caused the pound to plummet in the first place.
Have currency investors taken leave of their senses?
While it may appear so, markets loathe uncertainty above all else.
May’s assurance that the UK will leave the single market has at least provided international investors with more clarity regarding the government’s negotiating stance once it triggers Article 50 - the exit clause that sets out the process by which a member state may leave the EU and provides a two-year time limit to complete negotiations with the rest of the bloc - by the end of March.
Clarity is one thing, the certainty of a hard Brexit is quite another.
On Friday, the UK’s statistics office announced that seasonally adjusted retail sales suffered their worst monthly decline in six years last month as a surge in inflation, fuelled by the collapse in the pound, begins to erode British consumers’ purchasing power.
This put the pound under renewed strain in the clearest sign that sentiment in foreign exchange markets remains fickle and volatile.
The reaction to Trump’s presidency has shed yet more light on market psychology.
Not since John F Kennedy took the White House in 1960 has the election victory of a first-term US president led to a stronger stock market rally between the day of the election and the presidential inauguration, according to research from the Financial Times.
The benchmark S&P 500 index has risen 6 per cent since Trump’s victory, with US equity mutual funds enjoying a whopping US$60bn of net inflows between the day of the election in early November and the end of last year, according to EPFR Global, a data provider.
In the equity markets, investor emotions have been characterised by excitement and optimism based on expectations - almost certainly inflated - of faster growth driven by deregulation and a hefty fiscal stimulus package.
Yet beneath the surface of favourable sentiment in stock markets, investors have long harboured deep reservations about Trump, a brazenly populist and nationalist figure whose protectionist and anti-establishment inaugural address on Friday did nothing to dispel fears about his presidency.
Sentiment towards the new US administration is turning increasingly schizophrenic.
In a sign that the excitement is starting to give way to anxiety, US equity funds suffered their largest outflows since the election in the week ending January 18, according to EPFR.
If Trump does not quickly assuage investor concerns by providing more detail about his proposals to stimulate the US economy, the anxiety could turn to fear, and possibly desperation.
Market psychologists will have a lot on their plates in the coming weeks and months.
Nicholas Spiro is partner of Lauressa Advisory