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Commentary on financial markets – January 2017


  • USA: Donald Trump assumes the presidency
  • ECB: quantitative easing to run throughout 2017
    Changes in selected stock indices and commodities:


Trading in January on equity markets was relatively quiet, with most major indices for individual countries or regions posting decent gains.

The inauguration of Donald Trump as President of the United States of America and a series of his first statements and decisions as President gained the most attention among investors. Although these are not yet deep reforms approved by the Senate, the first executive orders suggest which direction the new US president’s policies will take. The ongoing and so far successful earnings season for US companies is thus drowned out by the expectations and fears associated with the new orientation of US policy. Indeed, it can be expected that some sectors may benefit greatly from the new policy, while others may rather suffer losses from it.

The European Central Bank, in the words of its Governor Draghi, will leave the quantitative easing programme (ECB asset purchases – pumping more money into the economy) running until the end of this year. However, he followed all this up by stating that the programme could be extended if necessary. In particular, he mentioned the political risks of this year’s elections in Germany and France. Thus, while the US economy is gradually raising interest rates, tightening monetary policy and at the same time preparing a large fiscal stimulus, the European Monetary Union is still in a state of expansionary monetary policy with the aim of driving the cost of money down.

The US dollar, stocks and Donald Trump’s policies:

Contrary to pre-election polls, Donald Trump’s surprise victory in the US presidential election unexpectedly kick-started an upward rally in US equities. Investors are expecting a big fiscal stimulus from Trump, which could help the US economy grow even faster than today. Even though the US economy is in very good shape, having emerged from the financial crisis under Barack Obama, Trump’s ambition is to return the US to its position as the world’s strongest player in the spirit of the slogan “Make America great again!”

From Donald Trump’s first steps in office, one can trace the future direction of US policy and its potential impact on (US) equities and the US dollar.

Donald Trump is planning huge infrastructure spending and at the same time wants to cut taxes for businesses and the middle class from 35% to 15%-20%. This would provide a huge stimulus to the US economy, but at the same time it would significantly increase the US public debt as budget revenues would fall while spending would increase. Nonetheless, these measures are welcomed by investors and the policy is good news for US equities (especially for companies in the infrastructure building and energy sectors) and for the strengthening of the dollar.

On the other side of the scale, however, is potential protectionism, as Donald Trump wants to partially close America – both its borders and its labour market. This has manifested itself in threats to US car companies to impose heavy taxes on imports if they produce cars in Mexico. In the wake of this, the carmaker Ford Motor has abandoned plans to build a new plant in Mexico, opting instead to expand current production in Michigan.

A symbol of the border closure policy is the planned construction of a wall on the border with Mexico. This has already caused a rift between the US and Mexico, with Donald Trump saying that Mexico, which refuses to do so, will end up paying for the wall. Trump wants to respond to this by pulling out of NAFTA (the North American Free Trade Alliance) and imposing a 20% tariff on Mexican goods. However, such measures would probably mean a weakening of the US dollar. Historically, the US has experience of this; when it imposed tariffs on Japanese car imports or steel imports, the dollar lost 30% in the first case and 10% in the second against the world’s major currencies.

So overall, US stocks are benefiting from the expectation of a big fiscal stimulus, but it remains unclear to what extent it will try to isolate America with various walls, tariffs and bans on people from, for example, Arab countries entering the US. This in turn could undermine US trade relations, putting downward pressure on the dollar and hurting specific stocks (e.g. banks, airlines, etc.).

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