Make no mistake: the ‘Trump trade’ has yet to run its course
The president’s recent health-care debacle makes it more likely he’ll deliver meaningful tax cuts; the global reflation trade still has legs
Could the “Trump jump” turn into the “Trump dump”?
As traders returned to their desks on Monday morning, this was the question on every investor’s lips.
The sharp rally in global equity markets and repositioning of investors’ portfolios triggered by Donald Trump’s victory in the US presidential election received a major jolt last Friday when he failed to get his health-care plan approved by the Republican-controlled Congress, casting doubt on his ability to win support for his much-anticipated economic policies, in particular tax reform.
Some of the most popular bets that have underpinned the so-called “Trumpflation trade” suddenly look less compelling.
The dollar index (a gauge of the greenback’s performance against a basket of its peers) is down a further 2 per cent since March 14, partly because of mounting concerns about Trump’s ability to secure Congressional approval for his pro-business policies.
US equity markets, which have been on a tear since the election, have become more volatile of late. The Russell 2000, an index of small domestically focused companies which would benefit the most from corporate tax cuts since these firms are less able to reduce their effective tax burden through overseas operations, has fallen more than 3 per cent since March 1.
Meanwhile, the probability of the Federal Reserve increasing its benchmark interest rate two more times this year has dropped to roughly 50 per cent, down from 60 per cent at the beginning of March.
Serious questions are now being asked about the shaky political underpinnings of Trump’s economic policies – and rightly so, given the president’s worryingly low approval ratings, the turmoil in his administration and the conspicuous lack of a unified Congressional coalition to enact his economic reforms.
Yet the Trump trade has yet to run its course.
Not only do investors remain fairly confident that some form of tax reform will eventually be passed – the health-care debacle makes this more likely given the political imperative, both for Trump and the Republicans in Congress, of delivering meaningful tax cuts – the Trump trade is part of a global reflation trade.
Indeed, on Tuesday equity markets were already rising again while the dollar index was moving back up towards the psychologically important 100 mark. The benchmark S&P 500 Index enjoyed its strongest gain in two weeks following the publication of a report showing that US consumer confidence in March surged to its highest level since 2000, in part due to optimism about stronger growth under the Trump administration.
Global stock markets are on course for their fifth straight month of gains, with the MSCI All-Country World Index, a leading gauge of equities in developed and developing economies, currently standing just a tad below its record high reached earlier this month.
Stronger economic data in Europe and across emerging markets, particularly in China, is buoying market sentiment, offsetting concerns about Trump’s political woes which, in any case, are not perceived as serious enough to derail his plans to stimulate the economy and deregulate the financial industry.
Manufacturing and services sector activity in the euro zone is expanding at its fastest clip in six years, while producer prices in China – which until last September had been contracting for four-and-a-half years – are growing at their fastest pace since 2008.
Make no mistake, the global reflation trade still has legs.
This is not to say, however, that “Trumponomics” is not the central pillar of the reflation trade. It most definitely is.
The question now is how much longer international investors are willing to give Trump the benefit of the doubt.
For the time being, the US president’s pro-growth agenda is still perceived as one which offers the best prospects for the economic stimulus baton to be passed from central banks to governments.
According to Convergex, a US brokerage, Trump is still a “hero” for markets. “Heroes don’t win every battle. In fact, they often fail along the way. But as long as they keep on the journey, there is hope that the next challenge [tax reform] will have a better outcome.”
Still, investors’ sensitivity to further political setbacks in Washington will only increase further from here on in. Trump’s honeymoon period with markets has more or less come to an end.
This does mean that the “Trump jump” is turning into the “Trump dump”. It simply means that investors have less of a spring in their step.
Nicholas Spiro is a partner at Lauressa Advisory