Among the worst week of recent history…
14 November 2016
Trump is elected so markets obviously… rise! This market is really paradoxical : it fears an event for weeks only to cheer when it actually happens…
Our understanding is that markets judge Trump this way: he will increase government spending through infrastructure projects and cut public spending (Obamacare) while cutting taxes. All of this is good for growth even though deficits rise somehow – it is not really bothering. This scenario is positive for growth and for inflation as well, which is why we observe a very sharp move over the last two days. The move can as well be explained by the very cautious stance held by investors before the event.
This market analysis may not still be up-to-date next week and we have to remain cautious. Protectionism could come back rapidly and amend this analysis.
In short, bouts of volatility are to be expected since overall, nobody knows what will happen.
Let us take a step back and look at things with cold blood:
- Markets are still positioned with a bearish stance, key technical feature
- Questions about Trump’s policy questions won’t be answered for weeks. At best we will have some speeches, but nothing clear.
- Markets do not like vacuum: when there is no news, it continues to move with other information: macro, micro data etc... This is what occurred few month back during the Brexit vote.
- This election will probably moderate inflows into Trump specific assets : Mexico first, and overall a part of Emerging markets
We are not worried about equities as long as rates do not rise too much: macro is positive, micro as well, investors are underweight equities. Neither do we think rates can continue to rise for a long time: US growth has trended down over the past few years, and with the exception of the Q3 GDP figure, 2016 is on the soft side. Markets can overshoot, but it is not our scenario, given that investors are already positioned short duration.
Lastly, dollar moves look pretty surprising to us. At first sight, we think Trump’s policy should weaken the dollar, but it rallies, even against G3.
La Française’s Essentiel Markets brings you an insightful analysis of the latest financial news by François Rimeu, Head of Total Return at La Française Asset Management.