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Trump trade dominates markets this week

Here are the big questions for investors ahead of the coming trading week.

What impact will Donald Trump’s press conference have on markets?

“I will be having a general news conference on JANUARY ELEVENTH in N.Y.C. Thank you.” That was how the president-elect last week [3] tweeted news of what is surely the first big market-moving event of the year — if it takes place. Mr Trump has form in announcing press conferences that subsequently are cancelled.

It may even be more significant than his January 20 inauguration, since the press conference should provide pointers to the address he will deliver to the American nation from the US Capitol after taking the oath of office.

The president-elect has demonstrated an unerring capacity to dominate the news agenda within 140 characters — last week, he tweeted variously on North Korea, China, Mexico, Toyota, Obamacare, Congress, Guantánamo Bay, job creation, Russian hacking, Arnold Schwarzenegger and a singer called Jackie Evancho who is performing at the inauguration.

As if investors didn’t know it, Mr Trump has a lot to say, and a lengthy press conference is the setting that will help answer the question that dominates every investor’s thinking: what will his presidency look like?

Investors began to answer that question after his acceptance speech in the early hours of his election triumph. After slumping nearly 2 per cent as his victory became clear, the dollar index promptly jumped 2.7 per cent as the market awoke to the possibilities of the incoming president delivering a package of tax cuts and fiscal stimulus.

The dollar was volatile in the first trading week of the year, a sure indication that investors are wondering whether the post-election rally was overdone. Wednesday will tell us more — if it happens.

So what does the president-elect think about the value of the dollar?

In the 2.5m words spoken or published by the president-elect and collected by Factbase, the combination “strong dollar” appears only once: a March 2016 town hall interview on MSNBC.

Mr Trump said: “People aren’t coming here, our high dollar — which sounds good to people. Everyone says, oh, that’s great. We have a strong dollar. We’re getting killed worldwide”

“Manufacturing and even — you look at tourism and everything else coming into this country, it’s not happening. We’re getting absolutely outmanoeuvred by devaluation.”

His promises on trade, tax and healthcare policy have naturally received most attention, and many might assume pro-growth policies are likely to mean higher interest rates, bond yields and a stronger dollar.

However, Bilal Hafeeze of Nomura points out the implication of a president determined to renegotiate trade deals for the benefit of domestic businesses: “A natural extension of these policies is a weak dollar policy. Simply put, dollar strength will offset the benefits of any import tariffs or other treaty gains to US companies.”

Foreign exchange traders may want to watch out for any clarifying tweets.

Is it the economists who were wrong, or the question?

If the sunlit uplands are yet to come into view, then neither has the swift economic downturn many feared the UK would experience after a vote to leave the EU. Andy Haldane, chief economist for the Bank of England, has called this the profession’s “Michael Fish” moment, invoking the TV weatherman’s infamous failure to predict a damaging storm that hit the weather-obsessed country in 1987.

Yet would it be the vote, or the act of Brexit that prompts businesses and consumers to cut spending?

With the government’s aims and timetable for negotiation still unknown Brian Hillard, chief economist for Société Générale, writes of the economy: “We are delighted that it has confounded the more gloomy expectations of UK forecasters, including us, but we still fear and expect an uncertainty shock to hurt sentiment and thus growth in due course.”

Will US earnings season nourish equity bulls?

Hopes for fiscal stimulus and a return to growth and inflation and a more business-friendly regulatory regime have helped power a near double-digit rally for Wall Street stocks since Donald Trump became president-elect.

Further strength requires a catalyst.

Step forward to the earnings season and we can expect plenty of attention to be turned on what chief executives have to say on the outlook for revenues and, ultimately, end-demand. With the Trump administration keen for US companies to invest in their domestic market, any word from boardrooms on potential plant and research spending will also be closely watched.

Investors are pencilling in an 11.5 per cent rise in earnings from S&P 500 companies for 2017 compared with 2016. With expectations so high, could a poor run of earnings reports leave stock indices looking exposed, and if so, how badly?

With financials leading the parade of early earnings — JPMorgan reports on Friday — we may well finally see Dow 20K on upbeat results and guidance. Goldman Sachs, the most expensive stock in the price-weighted Dow and JPM have lead the bluechip’s charge since November.

Has the vicious squeeze in the renminbi played out?

An eye popping two-day jump in China’s currency last week has shown signs of easing. Most analysts say the currency market has experienced a classic squeeze. Traders betting on a steady renminbi decline were forced to cover their bearish positions, in turn pushing up the currency.

Alan Ruskin at Deutsche Banks says: “One indication of how much this is just a positioning story, rather than a directional story for global risk, is that trades are being squeezed by a China currency appreciation, when an uncontrolled currency depreciation is what is really feared as being disruptive for the global economy and global risk.”

While things may look good for the People’s Bank of China in the near term, dollar strength and higher US interest rates over the long haul remain the big story for 2017. Minutes from the Federal Reserve’s December meeting were certainly on the more hawkish side as policymakers concluded that they could be forced to lift interest rates at a faster pace than expected if Congress passed Donald Trump’s economy-boosting tax cuts in the months ahead.

That will pose a significant challenge for the PBoC and its efforts in holding the line for the RMB.

How big was the tussle between the ECB’s hawks and its doves at its December meeting, and what might it mean for the euro?

The European Central Bank announced in December that its quantitative easing programme would run for longer, and although it at the same time reduced the size of its monthly bond-buying programme, it did so by €20bn a month, less than some analysts had expected.

There was some debate after the meeting about whether the revision amounted to tapering of the policy.

Thursday’s release of the minutes from the meeting will offer some insight into the balance between the hawks and the doves on the council and will reveal the extent of the discussion about alternative approaches. This comes when eurozone inflation has risen to a three-year high.

BNY Mellon notes: “There can be little doubt that the bank’s detractors will pressure it to hasten the tapering of its asset purchase programme”.

Reporting by Roger Blitz, Dan McCrum, Michael Mackenzie and Michael Hunter

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