Trump comes out empty-handed

13 January, 2017

Yesterday markets got their first clue about the path the US economic development, as Donald Trump held his first press conference after the election in November. Although this has not clarified much, as investors are still unsure about the path to take. Among many statements on the foreign policy and economic reforms, Trump avoided the most sensitive issues such as the fiscal stimulus and taxation, only the topics of most bullish bets have been concentrated on. The dollar came off the peaks with the European equities, while the Mexican Peso nosedived as the newly elected President threatened Mexico with a new defensive trade pact.

The fiscal stimulus remains the primary concern for stock and currency markets. It is a possibility for a tremendous increase in the government spending, especially in the scale voiced by Trump. The reasonable question is “Where does he get the money?”, as the last debt-to-GDP ratio in the US was 104.17, with government debt nominated in the national currency. With the private and business tax cuts (costing $7.2tn according to Tax Policy Center), infrastructure, jobs, social programs and military spending, the budget deficit will swell far over $20tn. To the keep country’s credit rating in check, a part of the funds for that spending will be obtained through various restrictive and defensive trade policies, as was heard at the conference.  Yet, the idea of expanding the budget deficit will be certainly faced with the need for approval from the Congress.

More and more investors catch themselves playing by the bullish rules, as Trump kept silent about the most important subjects. It is now going to be much harder to extend bullish play for the investors, while they are turning more cautious with the procrastinating tactics.

The US Dollar still holds the support zone at the 101 level, but now it is a lot more plausible to see a decline in the future back to the 100 level or even lower. The US stocks may have shown some inertial upward moves, including those fuelled by weaker currencies, but it is time to null over those corrections, as well.

Impact on  the markets

The defensive assets have been seen advancing sharply with Gold, Japanese Yen and Swiss Franc. Bullion is back at the 1200 level, as the Japanese Yen extends correction on Tuesday falling by 1%. The Euro and Pound surge, while sterling bulls cannot share the pleasure, as Brexit fallout adds more weight on the currency.  Floating-yield US and German sovereign bonds indicate that investors are back into the defensive mode. Crude Oil has been seen rising, as the currency it’s denominated in is rapidly losing value. The rise is especially confusing amid the upsurge of the US refineries operating capacity, boding bad for the global glut.

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