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Investors cool on Trumpflation after US travel ban

Investors, economists and strategists have begun to question their enthusiasm for Donald Trump’s new administration, following the president’s decision to block entry to the US from seven Muslim-majority countries.

Mr Trump’s travel clampdown appeared to knock some of the confidence from markets, after stock indices reached record highs last week following speculation the new president will deliver faster economic growth and accelerating price rises — dubbed “Trumpflation”.

“Markets have been too willing to give Trump the benefit of the doubt,” wrote Erik Nielsen, chief economist of UniCredit. “This past week, Trump sent increasingly persistent signals that he indeed intends to turn his populist and protectionist campaign into bad policies.”

After the president introduced what he called “extreme vetting”, the US dollar dropped 0.3 per cent against a basket of major currencies on Monday, with high demand for the Japanese yen amid a global flight to so-called safe assets. The CBOE’s Vix index, a measure of volatility for US stocks, jumped to the highest point since the US election, after touching a two-year low last week.

Mohamed El-Erian, chief economic adviser at Allianz, said the speed with which stock market prices have climbed since the November election left them vulnerable to signals growth is not a priority for Mr Trump.

“Markets are entering the third stage in their reaction to the US election,” he said, after the first two in which investors moved from enthusiasm to waiting for the transition from announcements to implementation. “Stage three is a tug of war between protectionist and pro-growth influences — and it is a much choppier phase.”

Mr Trump spent his first week as president focused on his most controversial campaign proposals, including plans to build a wall along the US-Mexico border and ordering a travel ban on people from seven Muslim-majority nations entering the US.

The decision sparked international condemnation and executives at prominent multinational companies including Google and Apple spoke out against Mr Trump’s order, which indefinitely prohibits entry for Syrian refugees, imposes a 120-day freeze on all refugees and bars people from Syria, Iraq, Iran, Sudan, Libya, Somalia and Yemen from entering the US for 90 days.

However, Commerzbank’s Ulrich Leuchtmann, head of FX research, said that while the US travel ban was driving market moves it was not due to investors taking a moral stance against the order.

“This is all about the financial markets not approving of hectic, surprising political moves that create chaos,” he said.

Others insisted it was too early for investors to review their stance on the new president.

The new policies did not mean the economic programme that Mr Trump campaigned on had not been abandoned, said Didier Saint Georges, Carmignac’s managing director.

“It’s what we saw in the 17th century in countries like France, Germany and England when a monarch would take an active role in influencing the economy and protecting the local industry — using political strength to help exporters,” he said. “It’s one we Europeans are familiar with.”

Ewen Cameron Watt, managing director of investment at BlackRock said he believed investors would remain in “wait and see” mode for now.

“It was all optimism at the beginning and there are issues around protectionism. But we have so far seen the things that can be carried out by executive order quickly. What investors are waiting for is legislation, which will naturally take more time and which may well be positive.”

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