Three reasons the ‘Trump bump’ can no longer be counted on to prop up financial markets

As recently as last December, the biggest source of turbulence in financial markets was the fear of excessive tightening in US monetary policy.

The dramatic repricing of the US Federal Reserve’s future rate policy began in January when the central bank abruptly put rate increases on hold. It really gathered steam last month when US President Donald Trump unexpectedly renewed his trade offensive against China, and, just last week, threatened to impose tariffs on all imports from Mexico.

The Fed was already under pressure from investors to loosen policy; Trump’s actions make it very difficult for the central bank not to cut rates without roiling markets. Having leaned on the Fed for several months to cut rates, Trump is now likely to get his wish.

The revival of the trade war is also heaping pressure on Beijing to deliver more stimulus, which could boost US stocks, Trump’s preferred yardstick of his success as president. Signalling the degree to which markets are betting on more stimulus in China, currency traders believe the escalation in tensions have tipped the scales in Beijing’s favour, pushing the yuan towards the psychologically important 7-per-US-dollar level.