Although a number of polls had pointed to Donald Trump’s chances of victory rising slightly in the final few weeks of the campaign, financial markets had been broadly positioned for a Clinton victory. As a result, the initial market response to the election result has been stark, with global equity markets moving sharply lower, bond yields receding and the Mexican peso weakening.
Looking further ahead, we expect to see above-average levels of policy uncertainty. Typically, uncertainty declines quickly after an election, but the possibility of unexpected announcements, sudden policy changes and ill-advised comments will likely be a feature for some time to come. It is a cliché that markets don’t like uncertainty, but as a result we would expect a higher risk premium for US assets.
Revisiting our original assessment of the impact of a Trump Presidency, little has changed. The implications for most assets continue to be ambiguous, with forces pulling prices in both directions. On the one hand investors may be put off holding US dollar denominated assets, while on the other hand, the dollar could benefit from an increased likelihood of US corporates repatriating some of their overseas cash holdings.
It also strikes us that many of Trump’s protectionist and anti-immigration policies, alongside significant fiscal stimulus, could ultimately be inflationary. However, all of these are second-round effects and would take time to materialise.
This divergence between short-term and medium-term risks is also reflected in Fed expectations. The increase in current uncertainty has reduced market pricing of a Fed rate hike in December, but the longer-term inflationary pressures could lead to a faster path of rate hikes once the dust settles.
It will take some time until we know how much of Trump's pre-election rhetoric illustrated below (originally posted back in July) will be transformed into actual policies. Although there have been some inconsistencies, these are positions he has been relatively consistent on during the campaign.
It will be interesting to see whether he follows through on his pledge to brand China a currency manipulator on day one. Trump has also promised to oppose the Trans-Pacific Partnership, with a clear focus on protecting US jobs.
Given the surprising mix of views from across the political spectrum, Trump is clearly not an ideologue with a firm set of core beliefs. You could view this negatively because markets don’t like uncertainty, or positively because it would let us discount some of his more extreme positions as starting points open to negotiation.
Importantly, we need to add Presidential constraints to the equation. The President of the United States may be the most powerful person on the planet, but he is far from omnipotent. The Constitution gives the President more leeway on foreign policy than on domestic affairs, but even on the former there are several checks and balances in place. Signing trade treaties, for example, requires Senate approval.
Also, how much change we can expect from Trump will also depend on his self-professed deal-making ability. It’s possible that his mix of positions allow him to draw support for some of his bills from both sides of the political spectrum; an outbreak of bipartisanship. At the same time it’s not inconceivable that he alienates both sides, resulting in even greater gridlock in Washington than in the past few years.
Decisions made by Donald Trump over the coming days and weeks will narrow down the many potential paths his policies could take. We will therefore be keeping a close eye on:
- His cabinet appointments - Should he surround himself with acknowledged experts with mainstream views, it could reduce the probability of unorthodox and unpredictable policy choices going forward
- Comments clarifying his stance on the Fed and Janet Yellen - Apart from undermining the Fed’s independence, a sudden change in Fed leadership could create unwelcome uncertainty as many investors could assume any replacement is unlikely to be more dovish
- Signs of Donald Trump’s learning curve - This is a process all new Heads of State go through, but given Trump’s lack of political experience and track record of being a loose cannon, the scope for initial errors seems greater and how quickly he learns from any mistakes becomes more important
Trump may have come up trumps, but the game is far from over.
For a more detailed discussion see Macro Matters: US election result.