- Markets completely got the US Presidential election wrong last week, but ended with good gains nonetheless. The week began with the view that “Trump should not win, but if he does markets will tank.” As it turned out, Trump won but the market melt-down lasted only a few hours – with Trump’s less belligerent victory speech quickly soothing market fears, and enabling the Dow Jones to reach a new record high. The focus now is the extent to which “post-election Trump” will be will be more responsible in approach than the “pre-election Trump”.
- In terms of Trump’s economic policies, markets are particularly excited about fiscal stimulus through tax cuts and increased spending on defence and infrastructure (including that wall!). This is helping construction and defence related stocks on Wall Street. Trumps’ other economic policy, reduced regulation, is also bullish for financial and health care stocks. The prospect of increased US fiscal stimulus is bullish for the USD and will add to upward pressure on bond yields. Indeed, the market still remains firmly of the view that the Fed will raise rates next month. Apart from post-Trump sector rotation opportunities (as noted above), US equities overall remain challenged by still-high valuations and sluggish corporate earnings. Any possible boost to economic growth and earnings from fiscal stimulus needs to be counter-balanced with the likely added upward pressure on bond yields and inflation. Indeed, it should not be forgotten that the US economy already has a fairly tight labour market, as evident with a now clear upward trend in wages growth.
- Although there is a smattering of US economic news this week (including retail sales & industrial production), neither will likely change the view on imminent Fed tightening and market focus will remain on what Trump says and who he picks for senior posts in his administration. Globally, the other key event is China’s “data dump” today, covering industrial production and retail sales, which are likely to show the economy still benefiting from housing/infrastructure related stimulus. Noteworthy last week was that China’s producer price index (PPI) hit a 5-year high.
- The “Trump trade” was also reflected in local markets last week, with the S&P/ASX 200 up nicely and bonds being dumped. Trump’s victory, along with China’s high PPI result, also provided another excuse for iron ore prices to rally further! Local interest this week will be on RBA minutes on Tuesday, a speech by RBA Governor Phil Lowe Tuesday night, and employment on Thursday. Nothing is likely to change the outlook for interest rates, with attention focused on the US and Trump.
- All up, to the extent Trump’s victory is bullish for the US economy and the $US, it reduces at the margin the chances of a further RBA rate cut in 2017. Key market themes remain a bailing out of local defensive yield plays (like listed property) in light of higher bonds yields, and a rotation toward financials for those still seeking yield. Resources are naturally still on a tear, but I remain sceptical of the sustainability of the recent surge in iron ore and coal prices and remain wary that “too much too soon” goods news has already been priced into the sector. BHP holds its AGM on Thursday.
- Equity markets will be focused on what Trump says and does this week. Markets will also likely re-focus on the prospect of Fed tightening next month and potential worries with regard to inflation and bond yields. With overall gains in equites still a challenging task, investors may well seek to focus on favoured sector rotation strategies, such as financials (as reflected in the BNKS and QFN ETFs), health care (DRUG ETF). I also favour further gains in the US dollar (USD ETF).
Have a great week!