Is The Bromance Fading?
The equity market today suffered a retracement and probably the worst since Trump won the election. The equities that suffered the most today were the ones that were expected to benefit the most under Trump. These stocks being the banking stocks, small companies and some of the technology stocks. Bonds rallied, bunds rallied and gold rallied. Oil softened because as expected more oil rigs were turned on as the price rose. Isolationist policies under Trump came to the fore today.
At the core of the weakness the markets can point to waning political capital. Trump has expended a lot of political capital in his first week as President and investors are concerned that initiatives such as tax reform, the repeal of Obama Care and tax cuts may be harder to implement. A number of Republicans have started to challenge Trump across these issues and given how Trump divided the Republican Party alienated Congress men and Women could choose to make life difficult when it comes to writing the legislation.
The bond market also gives a hint as to what investors are feeling. If you look at the treasury curve then you will see that the shorter maturities have moved at a greater rate than the longer securities. The ten year for example has moved far more than the 30 year. What the yield curve is saying is that over the long term Trump’s policies will have little material impact when it comes to long term sustainable growth and inflation. The shorter maturities are saying that there is a risk of inflation and above pareto growth. The worry or rather the concerns for the market are what happens if the Fed RAISES rates faster or more frequently than expected and push the economy slower.
The other question that one has to ask is what about Trump’s business interests? These seem to be at the forefront of his decisions. The nearest parallel is that of Mellon. Andrew Mellon was Treasury Secretary in the 20’s and into the 30’s. When the economy was running hot people forgot about his conflicted business interests. When the economy cooled Hoover the then President appointed him an Ambassador to the UK to prevent his impeachment. The lesson here is that as long as markets and the economy rise everything is forgiven. If the economy slows then problems could arise. The task for Trump is to keep an already steady economy growing when it is in a very mature phase.
The Brookings Institution has released a study of an economic impact on exports versus imports in various communities. The Brookings sourced both and looked individually at those communities that could be impacted. The results were that many of those communities that voted favourably towards Trump are the ones that will suffer the most should the US end up in a trade war with China. What these people forgot was that the main driver in their communities were exports not imports.
Aussie Market Today.
Global equities were weaker over the day. As a result I expect that Aussie equities should be somewhat unloved. Commodities were mixed with gold rallying but with China out on holidays I expect that the Aussie Dollar should remain stable to maybe drift a little lower, equities to be weaker and bonds to stage a small recovery.