US stockmarkets had risen steadily since the presidential election until a fall-off in the run up to Friday’s inauguration broke the winning run.
As the new president spoke, shares came off the highs reached earlier in the day, and the US dollar eased, unsettled slightly by the tone of the inauguration address and its implicit threat of tough action on trade.
But there were no major moves, and like the rest of us investors must now wait to see which of the campaign promises will be converted into policy action.With advisers to Trump reportedly predicting a “shock to the system” in the early days of the presidency, they may not have long to wait.
Views of the Trump presidency and its likely impact on the US economy divide into two camps.
Gains in the US market and the dollar in recent months have been driven by promises of a pro-business presidency able to make decisions, cut regulation and do deals with Congress – and committed to lower taxes and higher infrastructure spending. The inauguration speech promised to build “new roads and highways and bridges and airports and tunnels and railways” – all good for business.
More cautious views are driven by Trump’s economic nationalism and his threats to tear up trade agreements and impose tariffs on imports from countries such as China and Mexico. George Soros, the famous Hungarian-US investors, has forecast that Trump’s policies will fail because they are contradictory – and that the markets will soon realise this.
Campaign promise
There will be a key focus now on what Trump actually does. He appears to have already drawn back from his campaign promise to name China as a “currency manipulator” on his first day in office – an allegation that it has been keeping its currency weak to gain an unfair trade advantage. In fact, China has been supporting its currency on the markets in recent months.
But the new administration is still talking tough on China. Trump’s nominee as commerce secretary,Wilbur Ross, said China was the most protectionist of the major world economies, highlighting in particular accusations that it dumped steel on world markets.
Ross spoke of the need for “punishment” and “enforcement” if China does not change its trade practices, but played down Trump’s campaign threats of imposing 35 per cent tariffs.
Trump may decide to send some early signals on trade, in line with his promise to bring jobs back to the US. There are reports that he will immediately signal US withdrawal from the Trans Pacific Partnership, a proposed deal designed to free up trade between 12 countries around the Pacific including the US, Canada, Japan, Australia and New Zealand.
He may also signal in his early days that he wants to renegotiate the North American Free Trade Agreement with Canada and Mexico.
Aggressive action
The risk of aggressive action on trade is quickly increasing economic tensions – or even trade wars – which most economists believe could seriously damage jobs and growth.
This is where Trump’s economic nationalism creates economic uncertainty. Part of his narrative is that current trade arrangements have disadvantaged middle America. Economists warn, however, that imposing tariffs and quotas hitting trade could damage the very jobs which Trump is trying to protect.
It remains to be seen how the new president strikes the balance, and whether he just uses threats to try to strike deals more favourable to the US, or in fact takes aggressive action.
The markets will also focus on Trump’s plans to cut taxes and increase spending on infrastructure, where we may also see further detail in the coming days. However, here lengthy negotiations will take place with the US Congress, so plans will take longer to unfold.
But this too is a vital element of his economic programme involving major cuts in corporation and personal tax and new measures to penalise companies who make products abroad for the US market.
In the early days, however, it is what happens on trade policy that is likely to be the economic focus. Trump said other countries were “making our products, stealing our companies and destroying our jobs”. But what will he do about it?
We will soon find out.
