Trexit – the one thing Donald Trump can do to save the US and global markets in 2019

  • David Brown says there are hopeful signs for markets, despite the current confusion. The Federal Reserve can always be counted on to stabilise the world economy, the Democrats are leading the House, and Trump might just do the right thing and quit
PUBLISHED : Tuesday, 01 January, 2019, 1:03am
UPDATED : Tuesday, 01 January, 2019, 4:32am

It is often said that the darkest hour is just before the dawn. For eternal optimists, there is always hope that morning brings something brighter, more promising.

Global markets have had a lot thrown at them in recent years, from the 2008 crash and Great Recession to the European debt crisis, but they have always managed to bounce back, thanks to global policymakers’ ingenuity. But, as the New Year unfolds, investors must be asking what there is to hope for as a new uncertainty dawns. 

There’s a new kid on the block threatening markets – and it is called the Great Confusion. With ultra-low interest rates unwinding, quantitative easing finished, fiscal austerity back in vogue and the US-China trade war deepening, it is no surprise confusion reigns, investors are in a quandary and markets are slipping into chaos and disorder.

Roller-coaster stock markets say it all: the world is in deep turmoil and needs saving. A surging Volatility Index – the market’s renowned fear gauge – is the only winner in all of this.

It is always useful to take stock and consider the options. Investors can either join the stampede and hunker down in the nearest safe bunker or consider the alternatives. After all, there is still hope that global carnage can be avoided and things will not end in tears.

Deliverance is possible if the United States fulfils its traditional role as a fail-safe backstop for the global economy. The wheels already seem to be in motion and markets are beginning to sense the impossible may just happen again. It is early days, but there is every reason for hope.

There is a very good chance the US Federal Reserve could cut interest rates in 2019. If there is one grown-up left in the room right now, it is America’s much-maligned central bank.

The Fed has never shirked its responsibility for ensuring global financial stability at any cost. If the Fed is prepared to signal lower rates to settle the world’s nerves, there should be benefits all round.

Easier US monetary conditions would underpin global economic confidence at a stroke. It would boost market sentiment, ease borrowing costs for consumers and businesses, and ensure better conditions for sustainable, longer-term economic recovery.

After all, there are few signs of US inflation raising its ugly head right now, so it is a move the Fed could get away with, without jeopardising domestic price stability too much.

Why the Fed’s rising interest rates are cause for celebration

Lower US rates would mean a weaker US dollar, letting China off the hook of a currency collapse and helping to soothe US-China trade tensions in the process.

The Fed has the power to exert a real force for good right now, but the US political landscape could be a game changer for markets in the coming months. Betting on the return of positive politics could be the smart power play for investors in 2019.

While it is not the business of economists to foretell sweeping political change, chances are the destabilising effects of US President Donald Trump’s policies could come to a quick end in 2019. The walls are closing in on his beleaguered presidency and it may be time for markets to price in Trexit – Trump’s exit.

More than likely, he will be tamed by the incoming Democrat-led House. Impeachment is a possibility, but Trump may decide enough is enough and quit on his own accord.

Trump’s fiscal largesse has given an undeniable boost to US growth, but once he is gone, the prospect of an early breakthrough in the trade war and the odds of lower US interest rates could turbocharge global confidence and world financial markets. Hopes for 6 per cent-plus GDP growth in China would immediately be vindicated. China is already pulling out all the stops for more pro-cyclical stimulus but a less querulous US could make a huge difference.

They say hope springs eternal and there is always fresh cause for optimism, even at the darkest hour. Trump could do us all a favour in 2019 – by going quickly and quietly.

David Brown is chief executive of New View Economics