Stock markets have been in love with Mr Trump the great reflator. They look forward to his promised tax cuts for individuals and companies. They want his increased spending on infrastructure. They also quite admire the way he persuades big corporations to put America first and invest more of their corporate cash.
They do not like his potential protectionism and dislike his wish to limit migration. Some business people like freedom of movement as it helps keep wages down in the more successful parts of the world. Others like it because it allows talent and energy to move to the places where it can be best used. They want maximum access to world markets for their goods and services without tariffs and other government blockages.
Last week began well, with Mr Trump the deal-maker enrolling more investors into the US. It ended badly for markets, with a sweep of the legislative pen at the White House placing a temporary travel ban from people of seven countries – Syria, Iran, Iraq, Sudan, Yemen, Somalia and Libya. Mr Trump expressed surprise at the reaction. He said he was merely implementing a campaign pledge and seeking to keep the US safe. After all, Mr Obama had imposed a temporary ban on Iraqis in 2011. The problem was Mr Trump’s ban went wider and included more countries. He had to backtrack on some the details to allow pre-authorised people and dual nationals to carry on travelling as they wished and planned. The spat between Mr Trump and his critics upset the overall mood of the markets.
His undiplomatic language and rapid action angers those who disagree with him.
Mr Trump’s style will produce more of these rows with the Democrat establishment and their allies around the world. His undiplomatic language and rapid action angers those who disagree with him. Where he goes too far, the Republican establishment will rein him back. They have helped do so over the details of this latest order.
Judging what should happen to share prices against this background requires investors to make a calculation. Will they make more on the tax cuts and reflation than they could lose on the protectionism and the politics? Charles Stanley thinks they should – and so far they have. The President is largely in accord with Republicans in Congress on wanting major tax cuts. He is making it more likely businesses will invest in the USA. The last quarter of 2016, before he took office, showed business investment turning up anyway.
The President’s powers to introduce protection where the US already has free trade agreements are limited. He needs Congress approval to vary these agreements. He has to live under WTO rules where he wants to impose new tariffs. This means there has to be evidence of unfair trade by the other party before a penal tariff can be successfully imposed. Mr Trump seems to be signalling that he wants changes to NAFTA from Mexico, but he is not so worried about Canada. Putting all this into the balance will give us good and bad days in the markets.
The biggest risk probably comes from how he handles the US relationship with China. Mr Trump will want concessions from the country that has the largest trade surplus with the US. China will pose as the upholder of the WTO international trading system. There are worse complications over US military access to the Asian seas, and China’s strategy for expanding her maritime control over offshore islands stretched out over long distances. We will watch this carefully.
The above article by John Redwood, Charles Stanley’s Chief Global Strategist, was first published by Charles Stanley on 31st January 2017.