Increased uncertainty after Trump triumphs

Increased uncertainty after Trump triumphs

09-11-2016 | インサイト

Investors face increased uncertainty after Donald Trump was confirmed as the next President of the United States, defeating Hillary Clinton in a close-fought but bitter race.

  • Léon  Cornelissen
    Léon
    Cornelissen
    Chief Economist

Speed read

  • Real estate tycoon in surprise victory over former First Lady
  • Investors flee into safe haven assets as gold and bonds
  • Global treaties and independence of the Fed seen as being at risk

At 08:35 am European time, the real estate tycoon tipped over the 270 Electoral College votes that he needed to win the White House and become the first person from outside mainstream Washington politics to head the world’s largest economy.

The Republicans will also retain control of both Houses of Congress, giving them a landslide victory that, like the Brexit vote in the UK, went against all the odds and forecasts. They had previously controlled both the 435-seat House of Representatives and 100-seat Senate, but the Democrats had been tipped to retake the Senate.

Dow Jones futures were initially indicating a fall of 833 points on the Dow Jones Industrial Average Index when the US stock market opens, exceeding the previous record of 778 points following the Lehman collapse in 2008, and 684 points after the 9/11 terrorist attacks. In Asia, where trading was ongoing when the election results were coming in, the Japanese Nikkei stock market index went down 5.4%, while in Europe, stocks opened 3.8% lower.

The US dollar plunged over 2% against other major currencies while the price of gold – seen as a safe haven in times of crisis – rose 3.5% and the 10-year US Treasury bond yield fell by 12 basis points. The Mexican peso fell a record 11% and appeared to be the largest victim of the Trump victory following his threat to build a wall on the US-Mexico border.

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Massive anti-establishment vote

“It’s an historic day – the biggest political upset in American history,” says Robeco’s Chief Economist Léon Cornelissen. “It’s clear that US voters have chosen a candidate preaching disruption and have scoffed at continuity. It can be seen as a massive anti-establishment vote along the same lines as Brexit, where voters are basically fed up with the status quo.”

“The increased uncertainty means the climate for equities will be negative for the coming weeks, and sovereign bonds will benefit from their safe haven qualities, though some inflationary fears could creep in. In Europe, it’s likely that the European Central bank will extend its quantitative easing program with the implications that this has for the bond markets.”

“What’s really at risk here now is world trade and global growth, as Trump has threatened to tear up major trade agreements such as NAFTA and to impose hefty tariffs on Chinese products among others. Of course it remains to be seen what will materialize in practice, but understandably markets are very worried. Basically there’s been a rush towards safe havens such as gold and the Japanese yen. On markets, we should also reckon with forced selling – investors who have to liquidate their positions under these sort of circumstances – which is likely to send asset prices down further.”

Fed under threat

Cornelissen says the future role of the US Federal Reserve is also in question, and the rate rise that had been expected in December will probably not now materialize. “Trump had challenged the Fed’s independence during the election campaign, and this will further unsettle investors,” he says “It’s clear that he won’t reappoint Janet Yellen as Fed chairwoman when her term ends in 2018, but you can’t rule out at this point her earlier resignation, or the chance that the Republicans will propose legislation to curb the independence of the central bank.”

“And it is highly unlikely the Fed will increase interest rates in December. The irony here is that Trump suggested that the Fed was keeping interest rates artificially low to help Clinton, so you could even read this as a push for higher rates, which would be deflationary. Trump’s policy on the Fed may change rapidly once he’s in office, however.”

Landslide would end logjams

Cornelissen says one possible flipside of a Republican landslide is that there wouldn’t be any of the legislative logjams that bedeviled President Obama, whose Democratic policies were consistently blocked by the Republican Congress during much of his eight years in office. The Republicans had been expected to retain control of the US House of Representatives, but the Democrats had hoped to win control of the Senate, which has a more powerful role in endorsing Presidential appointments.


“What’s important is that the Republicans will get a majority in the Senate, which will be vital for getting through Trump’s nominations for his Cabinet and the Supreme Court,” Cornelissen says. The legislative logjam would be removed, but a majority in the Senate may not be sufficient to prevent the Democratic minority blocking things. The main issue is what would be Trump’s priorities.”

Infrastructure spending bonus

Cornelissen says one plus for economic growth is higher infrastructure investment in the US, which was one of the few things that both candidates agreed is necessary to fix the country’s crumbling roads and buildings.

“Another positive is that Trump has proposed a drastic reduction in corporation tax, which could lead to a return of US capital abroad, since a lot of US companies have stored money abroad,” says Cornelissen. “He has said no American business should pay more than 15% of their profits in tax, down from the current maximum of 35%. This would be good for profits at US companies longer term.”

“But this could all be overshadowed by the negative fallout of global trade wars, and ongoing geopolitical instability on several fronts. Basically, Trump is an unknown quantity who is mostly known for insults and rhetoric, so we’ll have to wait to see what turns out.”

“On climate change, Trump has pushed for less regulations against fossil fuels in the US. It’s clear that beating global warming won’t be one of his priorities. President Trump would probably push for a major deregulation effort for the domestic oil, gas and coal industries, which explains why the oil price has gone down, as over-supply is contributing to the current glut. This would make life a lot more difficult for OPEC and could go either way for US shale producers, since it would be positive for production but negative for prices.”

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