Monday, January 23, 2017

‘Trump Trades’ in Reverse as New Presidency Sparks Jitters
by Robin Wigglesworth and Eric Platt in New York
Financial Times

Financial markets suffered a setback on the first full trading day of Donald Trump’s presidency, with many of the popular “Trump trades” reversing course because of investor uncertainty about the most unpredictable US administration in generations.

The S&P 500 fell 0.3 per cent on Monday, led by declines in industries such as banking, energy and manufacturing which have been the biggest winners since President Trump unexpectedly clinched last year’s election.

US energy stocks declined 1.1 per cent, industrial shares fell 0.7 per cent and financials slipped 0.6 per cent. The biggest US equity gauge is now just 1.2 per cent higher this year, after jumping more than 5 per cent between the election and the end of 2016.

A widely watched dollar index fell 0.6 per cent to its lowest level since early December and bonds rallied as investors sought out the safety of government debt, with the 10-year Treasury yield — which moves inversely to price — sliding 7 basis points to 2.4 per cent.

“There is no doubt you have seen a stall in the momentum of the rally across various risk markets,” said Michael Buchanan, deputy chief investment officer of Western Asset Management.

“Part of that is due to the excitement and euphoria after the election and investors . . . focusing on everything [that was] pro-business: deregulation, infrastructure spending, tax reform, tax cuts. You didn’t initially hear much about what the market was concerned about: immigration policy, tariffs, protectionism, anti-globalisation,” he pointed out.

Mr Trump’s November victory triggered a powerful stock market rally, as investors bet that the Republican clean sweep would lead to deregulation, fiscal stimulus and corporate tax cuts. But investors have become more cautious in 2017, paring back many of the most popular post-election trades.

Mr Trump’s combative inauguration speech on Friday — when he promised to reverse economic and social “carnage” and put “America first” — also triggered a dip in equities, as investors became more wary over how much the new president would be able to implement and the dangers of protectionism and trade wars.

Those concerns were not allayed by a meeting with business leaders at the White House on Monday, during which Mr Trump offered a mix of carrots and sticks, pledging to cut red tape and taxes domestically but also to impose a “very major” border tax on companies that move manufacturing overseas.

Soon after the meeting, Mr Trump withdrew the US from the 12-country Trans-Pacific Partnership, a trade deal championed by former President Barack Obama.

“The recent price action in markets suggests that some of the post-US election euphoria may be fading,” said Mark Schofield, managing director of global strategy at Citi. “There remains great uncertainty as to how many of President-elect Trump’s pre-election mandate will either be delivered or executed.”

The corporate earnings season has offered little support. Just over a fifth of companies in the S&P 500 have now reported their earnings for 2016, with earnings-per-share climbing from $30.81 to $30.93 — thanks largely to healthy results from banks with big trading operations.

Bruce Bittles, chief investment strategist at Baird, said “that a shift away from the excessive investor optimism seen in the market is likely required before the rally resumes”.

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