Markets Spotlight: Second phase of the Trump trade

Our round-up of the week’s best comment and analysis from the Financial Times focuses on trade after Donald Trump’s inauguration, the consequences of Theresa May’s speech on Brexit and upcoming changes in inflationary trends in Europe. The selection is taken from our Markets Insight and Smart Money columns, written by industry contributors and FT commentators.

John Authers, the FT’s senior investment commentator, called the beginning of the second phase of the Trump Trade, which he wrote will be characterised by increasing volatility in the dollar for Wall Street stocks. The main ideas behind Mr Trump’s visions of trade are “border tax”, which will be imposed on products imported to the US, and antipathy to the strong dollar.

“Progress from here will depend on what gets passed in Washington — and investors will have to put up with plentiful confusion and false starts. Expect rising volatility and reduced correlation between stocks as traders react to Mr Trump’s specific comments as they arise.”

Anthony Belchambers weighed the implications of Theresa’s May’s pledge that the UK will leave the EU’s single market under the terms of a “clean Brexit”. The chairman of the advisory council to the Financial Services Negotiation Forum said regulatory equivalence with the EU now offered the best hope for a deal between the bloc and the first country to leave it.

Equivalence would offer the best replacement for passporting rights, and might help to avoid a “lose-lose” outcome for both sides, he argued. But the EU might not be entirely willing to accept this way out.

“The only way forward for both sides is a ‘bottom up’ negotiation that first agrees on a foundation of proven and future-proofed equivalence and then negotiates to establish a mutuality of maximum access. This is about a clean Brexit that is pro-business, pro-growth and pro-Europe.”

The FT’s markets editor, Michael Mackenzie, pointed out that Mrs May’s speech has not necessarily reduced chaos in British politics caused by Brexit, one of the reasons that could keep the pound under pressure. Another is the strong dollar, but only further clarification over Brexit will help sterling to strengthen its foundations, he wrote.

“Any sense of a softer exit that helps the UK preserve trade and business relationships should help sterling find a floor. Indeed, the pound enjoyed a dramatic relief rally on Tuesday after Mrs May outlined her approach for leaving the EU, including presenting the final terms of a deal to a vote in both houses of parliament.”

Mohamed El-Erian, economic adviser to Allianz, cast a careful eye over the pro-growth and trade policies of the new US president. Investors are not fully convinced by the forecasts of the US’s growth improvement, he argued, they are still twitchy over risks to pricing and shaking longstanding trading relationships.

The lesson of the past few weeks is that fulfilling the country’s considerable economic and financial wellbeing under the Trump administration will require more than the implementation of his pro-growth policies

“The management of ’win-win’ cross-border production and consumption relationships needs to be undertaken cooperatively in the context of wider internal reforms by more than just the US. Indeed, the lesson of the past few weeks is that fulfilling the country’s considerable economic and financial wellbeing under the Trump administration will require more than the implementation of his pro-growth policies.”

The FT’s capital markets editor, Dan McCrum, warned that European investors and consumers should expect the end of deflation, mainly due to lower unemployment and a stronger dollar, as well as populist, pro-wage promises made before elections in some European countries.

“Does this matter for investors? One of the biggest potential changes to the outlook is the withdrawal of stimulus measures by the European Central Bank . . . Rising prices in Europe’s largest and arguably most anti-inflation-minded economy is likely to lead to calls for a reduction in stimulus measures.”

Henny Sender warned against unconditional love for Japanese equities, arguing that the bullish outlook many investors have for Tokyo depends on more than a weaker yen and the role of the country’s central bank.

“The most significant threat on the horizon is probably the potential loss of credibility from the Bank of Japan. The BoJ has been consistently wrong about inflation at a time when the yen is already weak, potentially a dangerous combination.”