To sell or not to sell?

To sell or not to sell?

Trump will be inaugurated Saturday, and with that comes the responsibility of running a large powerful country and a somewhat vibrant economy. What markets have to decide is whether all the bluster and rhetoric will actually transpire and confirm the rally that we have seen in equity. The thesis for the equity rally is that there will be tax reductions, deregulation and spending on infrastructure.

To date we have seen no policies and the one recent Press Meeting turned into a mindless rant and since Wednesday last week markets have become more sanguine and are now looking for actual policies. What Trump successfully did was turn worker against worker by inflaming populist issues and blame people who are not to blame. The reason why Trump supposedly won was because wages have not grown for considerable time and this interestingly makes one question then why has productivity fallen rather than risen. Trump will need policies that stimulate productivity. The other pointer is that Trump was going to create 25 million jobs. To get to this position that will require fully employing all graduates, keeping employed all the current workers and immigration. Trump is anti-immigration so the productivity question is clouded. We would also require growth above 4% for some time and interest rate rises would slow growth. Along with rising growth rates many are looking also for wage rises which have been pretty meaningless for some 15 years. On this point it is worth noting for example that the average Walmart employee is not paid a living wage and has to supplement their wage with other sources of income. This diminishes spending, lowers economic growth. For the US to become great again wages need to increase, this is not consistent with many Republicans in Congress and the Senate and means such policies may not be passed.

This may be why bond markets are now starting to turn. Bond markets are rarely wrong and are a solid gauge of economic performance. Ten year bonds have rallied some 10 bp from the worst and are trading around 2.4%. Tips, the inflation linked bonds have rallied significantly since mid-December. Tips are measuring real rates of return and traders effectively trade an inflation outlook.  Bond traders are trading as if they believe Trump won’t be able to achieve what he wants to achieve. If bonds are right then equity markets may need to retrace, however we may not see any retracement soon, but when it does happen it could be quick.

Friday saw a volatile day for bonds. Inflation numbers where a little higher than expected and bonds were initially sold heavily before buying emerged and bonds finished roughly unchanged from the previous day to close about 2.40%.

Theresa May provided some of her thoughts towards Brexit and those thoughts appear to be very much a dissociation of the UK Financial system from the EU. Given Banking and Finance are an important source of employment and taxes the UK Government will need a new industry to provide employment and other benefits.

Aussie Market Today.

The US dollar is continuing its weaker trend and the Aussie dollar is rallying as a result, this trend may continue into Saturday when we hear Trumps inaugural speech and where Trump outlines his vision and policies for making America great again (a Reagan tagline).

The speech of Trump will be important for Australia’s interests. A misstep here could hurt Australia in an unexpected way if Chinese interests sought to punish Australia for taking a US point of view. China represents about 27% of our trade and is commercially important for Australia and far more so than the USA.  The AUD could be sold and so too assets.

In the meantime bonds should hold steady to perhaps a mild selloff leading into Saturday. Equities for the moment should remain resilient as commodities were mixed. Iron ore was steady.