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Markets muted as Trump takes office

Friday 21:00 GMT

Overview

Financial markets gave a relatively muted response to Donald Trump’s inaugural speech as US president, with US stocks edging higher, Treasuries putting in mixed performances and the dollar easing back against its main rivals.

Oil prices rose sharply amid hopes that producers would show compliance to a global deal to cut output. Gold initially struggled for traction but held above the $1,200 an ounce mark.

Hot topic

The day belonged to Mr Trump, as he finally took the keys of the White House following one of the most bitter elections in US history.

His victory in November fuelled a strong rally for US stocks and the dollar and a steep sell-off for Treasuries amid a surge of optimism that his promises of fiscal stimulus, infrastructure spending and lighter regulation would bolster economic growth and corporate earnings and prompt a faster pace of US interest rate rises.

While Mr Trump’s first speech after his election victory had struck a noticeably conciliatory and “presidential” tone, Friday’s speech “was a big departure from that,” said Kathleen Brooks, research director at City Index.

“He admonished the establishment who were standing right next to him, he expounded the benefits of ‘America First’, and his speech struck multiple notes on protectionism, from manufacturing, trade, jobs, defence and foreign policy.”

“Mr Trump’s first address as president gives investors a lot of food for thought.”

Much of that thought is likely to be directed at what Mr Trump achieves in his first 100 days in office.

Philip Marey, senior US strategist at Rabobank, sounded a note of caution about the potential impact of Mr Trump’s plans.

“Increased government spending and lower tax revenues may push up the public debt trajectory,” he said. “This could hurt the long-term outlook for the US economy. What’s more, Mr Trump’s trade policies could backfire rapidly and undermine the positive impact of his fiscal policy initiatives.”

In New York, the S&P 500 equity index settled 0.3 per cent higher at 2,271, within 6 points of the record closing high secured on January 6. The mood was less sanguine across the Atlantic, where the pan-European Stoxx 600 index shed 0.1 per cent.

Longer-dated US Treasuries, meanwhile, fell back, pushing the yield on the 10-year note up 1 basis point to 2.47 per cent — well off the day’s peak of 2.513 per cent. The two-year yield, however, was 3bp lower at 1.20 per cent.

Forex

The dollar turned lower in the wake of Mr Trump’s speech, trading 0.3 per cent down against a basket of currencies, as the euro edged up 0.2 per cent to $1.0688 and the US currency slipped 0.2 per cent versus the yen to ¥114.57.

“Heightened policy uncertainty is contributing to a volatile US dollar,” said Lee Hardman, currency strategist at Bank of Tokyo-Mitsubishi UFJ.

Mr Trump this week expressed concern about the strength of the US currency — prompting it to retreat — only for Janet Yellen, chair of the Federal Reserve, to subsequently deliver hawkish comments on interest rates that put it back on upward track.

Mr Hardman highlighted comments from Steven Mnuchin, Mr Trump’s nominee for Treasury Secretary, which “should help to ease concerns that the Trump administration will officially adopt a weak US dollar policy, although the market will remain wary that verbal intervention could still be used to dampen US dollar strength.”

Meanwhile, the Mexican peso rallied strongly against the dollar amid relief that Mr Trump had made no concrete threats to Mexico in the speech. The dollar was down 1.8 per cent at 21.5625 pesos.

China’s currency was largely not influenced by data showing the country’s economic growth had come in at 6.7 per cent as expected. The onshore renminbi is 0.1 per cent weaker at Rmb6.8729 per dollar and the less tightly managed offshore rate is flat at Rmb6.8464.

Equities

The stock market mood was lacklustre in Europe ahead of Mr Trump’s speech, with the pan-European Stoxx 600 index shedding 0.1 per cent.

After a choppy morning session, Japanese equities finally managed to gain altitude in the afternoon, with the broad Topix index climbing to 0.4 per cent.

Greater China bourses were muddled, with Hong Kong’s Hang Seng index off 0.7 per cent but the Shanghai Composite gaining 0.7 per cent as investors welcomed the batch of mostly positive economic data, and after the central bank injected liquidity into the system ahead of the new year holidays at the end of the month.

Australia’s S&P/ASX 200 fell 0.7 per cent as its finance and materials segments both came under pressure.

Commodities

Brent oil rose 2.5 per cent to settle at $55.49 a barrel, giving it a two-day gain of more than 3 per cent.

“Over the weekend, the first meeting of the Opec/non-Opec compliance and monitoring committee takes place in Vienna,” noted Elsa Lignos, strategist at RBC Capital Markets. “The weekend meeting should see more details on the de facto compliance policy.”

Gold was up $2 on the day at $1,207 an ounce, and up $10 on the week.

Additional reporting by Hudson Lockett in Hong Kong

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Via FT