MARKET FINDS POSITIVES IN TRUMP ELECTION
Written on the 10 November 2016 by James Perkins
THE ASX has had its best day in five years in the wake of Donald Trump's election as the United States President.
Investors are seeing the positives of Trump's planned tax cuts, infrastructure spending, cuts to green energy subsidies, and his plan for tariffs on Chinese goods and more aggressive approach to international trade.
Miners are leading the comeback, with BHP (ASX: BHP) up 7.51 per cent at $24.255 per share early this afternoon due to its exposure to US shale interests. Another winner is Bluescope Steel (ASX: BSL), which owns a major steel factory in the US - it is trading up 12.43 per cent at $8.32 per share.
Among the other industries expected to benefit from Trump's presidency include oil and gas, pharmaceuticals and defence.
The Australian Dollar suffered a swift drop against the USD as Trump's victory unfolded. Today, it is trading at $0.766, and CommSec analysts predict that in the long term, it will fall around 5 per cent to $0.74c.
"Shaky financial market risk sentiment and the prospect for a more hostile approach to trade following Trump's victory suggest commodity-sensitive currencies like AUD, NZD and CAD are vulnerable to more downside versus the USD," says CommSec in a report this morning.
CommSec analysts believe the US Dollar will hit cyclical highs, inflation will increase and capital inflows into the US will increase.
"Capital inflows to the US will increase under a Trump administration because the cut in the company tax rate will bolster the US equity market and generate a repatriation of US profits back into the US economy," says CommSec.
"Trump's economic policies are inflationary and will force the Fed to raise the Funds rate at a faster pace than otherwise."
Scott Mather, PIMCO Chief Investment Office agrees.
"Expect markets to move from pricing in a permanent lagging of the 2% inflation target to viewing an overshoot equally likely," says Mather.
"Ultimately, we think this means the Fed will move faster on rate increases than the market had been pricing for in the year ahead, but still in line with our forecast for two to three rate hikes before the end of 2017."
Mather believes the initial tightness in some financial conditions and concerns about trade frictions may be drags on growth, but will likely be overpowered.
"Prospects for meaningful tax reform and infrastructure spending could boost prospects for growth considerably over the coming years, although it's hard to put numbers on this yet," says Mather.
However, Mark Wallace, head of economics at RPS in Australia Asia Pacific, says the increased confidence and growth outcome is contingent on the Republican congress passing Trump's spending plans, which may not happen.
"If Trump can reconcile his policies, the US Dollar will strengthen. But several things need to happen. It is up to Congress to implement fiscal policies in the US, but we don't know what they are going to do. There is talk they won't fund the wall (between the US and Mexico) and will maintain financial restraint. If that is the case, we won't see the infrastructure investments," says Wallace.
"If Trump puts through his tax cuts for the wealthy, and the infrastructure projects do not get approved, then the US budget situation will deteriorate faster than it is now and the US dollar will fall dramatically."
Wallace sees Trump's plan to label China a currency manipulator, while slapping 45 per cent tariffs on its imports into the US, as a danger to Australia. The worst-case scenario a trade war between China and the United States two of our three largest trading partners.
"China is the largest holder of US debt, and a major importer from the US. The worst-case scenario is the trade war may escalate from tariffs to embargoes and international interference in trade routes," says Wallace.
"Trade is two-way. If the two largest economies in the world are stuck in a trade war, that is not good for the world and it is not good for the middle-income countries, of which Australia is a classic example."