Financial markets have swiftly reassessed Trump’s win, embracing it with bullish gusto. After a gracious acceptance speech there is faith that a more Presidential persona will replace the extreme character portrayed to win populist votes. Markets are moving on even more quickly than after the UK referendum Brexit result. Investor skin has clearly thickened in the interim. Which bodes well, given increased probability of similar political change in Europe over the coming 12 months; elections in Austria, France, Germany and a referendum in Italy are all lined up and could surprise too.

Investors are also pushing equities higher on hopes that the new US President’s massive infrastructure spending plans and huge tax cuts will deliver US growth and fuel inflation. This may allow the US Federal Reserve to actually proceed with its path of gradual rate hikes and monetary policy normalisation, drawing a line under a very protracted recovery from financial crises.

It may also be a first step towards reducing global monetary policy divergence, which is important right now, given acknowledgment from peer central banks (ECB) and even governments themselves that central banks can no longer do all the heavy lifting in terms of stimulus. Help via fiscal policy is paramount, to rebuild not just America but the world.

In September, ECB President Mario Draghi warned of the dangers of keeping interest rates low (negative in his case) for too long. This suggests fears that the limits of central bank policy are close to being reached. New UK PM Theresa May has been critical of low interest rates penalising savers. Given that investors have become rather addicted to almost a decade’s worth of cheap money and accommodative monetary policy, sending bonds and equities to stimulus-fed highs, this represents a risk in terms of pulling the rug out from under markets. Unless, of course, it can be offset.

Outside the US, growth and inflation have failed to return as quickly as hoped, despite almost 10 years of extraordinary policy and stimulus. The ECB and BoJ have gobbled up much of the available supply of government bonds needed for QE to help keep borrowing rates low. The ECB and BoE have already expanded purchases to include corporate bonds. How far can the ECB and BoJ take rates negative before killing high street banks, themselves key institutions for growth? How long before a central bank is forced to consider buying equities? Markets would love it, but it’d be a dangerous rubicon .

The Brexit vote signals discontent with the European model. The Eurozone sovereign debt crisis showed the risks of grouping too many different countries under one currency umbrella, allowing lazy member governments to rely far too much on the ECB in times of crisis. Change is required.

And so the arrival of Trump is fuelling hope that his;

1. Arrival will shake up the US (and global) political establishment,
2. Business background means a leader with a better understanding of how the economy actually works,
3. Pledge to spend big and cut taxes will spur peers to look to the world’s #1 economy as a first mover and follow suit.

It may be late in the game, but better late than never. Any attempt to help central banks escape from years of being cornered into intervention by government inaction and to normalise policy (remember when base interest rates were above 1%?) is welcome in my view. Said intervention has literally cost the world and only really helped financial markets. Not the man on the street and thus economic growth.

We have fretted all year about another US rate rise derailing the US recovery and meaning global policy divergence versus peers moving in the opposite direction. We have also seen an inordinate media focus on each central bank update for clues about the next extreme stimulus measure needed to keep the ball in the air on governments’ behalf. Any success Trump has in reducing the burden and market focus on central banks will be a step in the right direction. A rising tide….

It may well cost a pretty penny/dollar/euro/yen, but, then again, hasn’t it  already?

Mike van Dulken, Head of Research, 10 Nov