The long awaited November 8 election in the United States resulted in an outcome that overturned all predictions, very similar to what the world witnessed with the British vote on Brexit. As it was unexpected, the international securities markets reacted with total disorientation at the open of the first session of the Trump era which was marked by a sharp decline, both stocks and currencies, but regained their composure later in the day. Drops in the index value in the order of 5% during the session, are an expression of the great uncertainty dominating the markets. In fact, the perspective that is being played out on the economic front appears epochal in the sense that one must assess whether the new, unexpected, course of US economic policy will or will not be able to initiate an US reflation such as to break the deflationary cycle that characterizes most other developed economies. In recent months experts increasingly believe that a resurgence in inflation process is underway, favored by the renewed growth of the Chinese economy and the recovery in the price of many raw materials. The most obvious consequence of the embracement of this thesis has been the rise in long-term bond yields, particularly marked increase for US government bonds albeit a more modest increase of those of Europe. But the realization of the reflation thesis is based on an assumption that is difficult to implement, that is – a reduction of the mountain of global debt, of which at the moment one does not see any indication on the horizon. Indeed, if the new US administration should live up to its election promises, there will be a significant increase in the US Federal deficit in order to finance public spending on infrastructure, defense, and due to the reduction of the tax burden on businesses. Just this new fiscal policy was enough to induce international investors to reverse their convictions on the dollar, which in a few sessions has returned to a high of 1.05 to the euro, already witnessed a couple of times over the past 12 months. In fact, both candidates for president had planned an increase in public spending to support the economy, but only Trump had emphasized lower taxes. The marked reaction in the exchange rate and long-term bonds could be premature, especially since the new administration will have to deal with Congress.
The new administration will enjoy a Republican majority but some members of Congress and the Senate will be up for re-election in two years and, therefore, may be less inclined to support tax measures that can significantly increase the deficit. So, the last two weeks could have been a kind of “false start” in terms of reflative expectations, in the sense that the fundamental reasons for the same are valid, but the realization of the process will definitely take more time than the knee-jerk reaction indicates. This suggests that in the short term, the S&P 500 index may consolidate around the 2000 level, the ten-year government bond yield could come back towards 2%, and even the greenback could retrace its recent gains returning to technical support level of 1.08 with the Euro. A Fed rate increase in December seems totally obvious also because it once again brings into focus the institution’s credibility as was the case of the rate hike in late 2015. While the expected economic slowdown in the first half of next year puts to bed any other increases before the summer; the dynamic of possible variations, would present opportunities for new investments to be initiated during retracements, because in any case, the change of the resident at the White House will have a positive effect on the economy by the end of 2017. While, inheriting the legacy of the previous administration and the natural tendency to put issues on the table at the beginning of a new term, could lead to negative surprises regarding US growth in the first half of next year. Investments that you may already consider at current levels are represented by gold and gold stocks, as the reflation scenario is favorable to the yellow metal, and Asian stock markets, with particular emphasis on China, which this year has resumed its convincing role of locomotive of the area, thanks to the success of the monetary policy followed by the PBOC since year-end 2015.
Nicola Bravetti Fonte dati: Bloomberg