The Weekly - Don't fight the Trump

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02/07/2019
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We are not sure whether Donald Trump is an advocate of President Abraham Lincoln, but he should bear in mind his status in the hall of presidential fame, the Lincoln Memorial in Washington and his presence on the $5 dollar bill. Any would-be presidential hopeful or serving incumbent can but dream of achieving such eternal greatness, but all political leaders must harbour a desire to go down in history as a cut above the rest and be remembered in some eternal way for some great achievement.

Donald Trump has always found the showcase declaration of self-achievement irresistible and tweeted vehemently against anyone who dares to question him. It is hard to imagine that the US will ever be blessed with quite such an equivalent once the era of Trump is gone. But then again, in this era of populism and anti-establishment demonstration, there are few democratic leaders that maintain public admiration for very long once elected. Angela Merkel of Germany is one of the few remaining, but even she is in the twilight of her powers and will soon stand down.

Aside from Abraham Lincoln’s obvious place in history, he was also notable for many quotations. One of which, from a political perspective was “You can fool all the people some of the time and some of the people all the time, but you cannot fool all the people all the time”. Whether by design or chance, Donald Trump would appear to be testing this to the maximum with his own assessment of whether the ‘some’ that elected him can continue to believe and repeat the exercise in November 2020 for his second term. There must be some doubt considering his current alienation of many of the ‘some’ via his tariff war with China. Manufacturing businesses and farmers, amongst others, are starting to protest to Congress regarding the impact to their businesses and livelihoods and the real tariff impact which costs them and not China.

The tariffs were first mooted by Trump during his presidential campaign, but many thought he had changed his mind in the year that followed his election and the tsunami of economic condemnation. However, his determination to follow this through was then revealed during 2018 and this has been the single biggest disruptor to markets ever since. Initially, the US equity market outperformed whilst Asia weakened significantly such that from 31 May 2018 to 31 October 2018, there was a 13-15% relative performance difference between the two markets (source: FE Analytics in £). This was a critical geographical investment call during that period and any investment manager who was positioned incorrectly would have had a very poor 2018. Since then, the two markets have ebbed and flowed with the US falling significantly during December 2018, whilst Asian markets fell less so. At the time, investors also became very concerned about Trump’s apparent interference with the Federal Reserve Bank and his potential to sack its Chairman, Jerome Powell.

Nothing has really changed since then. In fact, the tariffs have been raised several times and the Chinese have retaliated several times. Trump’s pressure on the Federal Reserve Bank hasn’t abated, such that he blames them for the equity market malaise in December, rather than his interference, and continues to press for interest rate cuts. His personal performance benchmark is the level of the US equity markets, which are near all-time highs.

The G20 meeting in Osaka over the weekend was prefaced by his announcement of a re-engagement with Xi Jinping of China at the summit. This caused a surge in the markets. The resulting announcement from Trump further fuelled optimism as new talks were announced and the latest round of planned tariff increases were suspended with some watering down of the embargo on trading with Huawei. The Chinese duly responded by committing to buy US soybean once more. Quite how businesses are supposed to plan and respond to this is yet to be seen, as the respective leaders turn their respective trade restrictions on and off with a day’s notice via a tweet, ad-hoc meeting or press statement.

Then there was Trump’s impromptu meeting with Kim Jong-un in North Korea which was billed as a sudden idea whilst he was in the region. We find this hard to believe but the reported headlines of his becoming the first US president to set foot in North Korea would have pleased his election campaign managers. There has also been a pledge to restart the failed talks. Not a bad weekend’s work for the would-be second-term Republican candidate.

However, and this is the important point, not only has the Federal Reserve Bank become highly politicised, but so have the markets, both equities and bonds. This is not a comforting development but a very clever one on the part of Donald Trump. US voters are far more connected with the equity markets than anywhere else in the world – it is part of their cultural capitalist psyche. It will evolve into a mantra such that voting Democrat will make you poorer whereas supporting Trump into his second term will provide the opposite. This has important implications for investors and how they position their portfolios as it may cause economic disruption after he has gone.

We all know that if the US sneezes, the rest of the world catches a cold. This is market-speak for the dependency of the rest of world on the performance of the US economy. There are signs ahead of a significant slowdown with predictive indices such as the US Transportation Index, measures of US truck shipments, purchasing manager indices and global trade volumes all suggesting a slowing. There is also evidence of US manufacturers having to increase prices as the tariffs start to bite into their margins via raw material price increases. The last jobs report was particularly disappointing. This is exactly as predicted by the anti-tariff economic community. Tariff wars reduce global trade, raise prices and stifle profitability for all participants, leading to job losses.

Meanwhile, investors continue to believe that Donald Trump will come through and confound us all, as he has done ever since his election. Many have tried and failed to bring him down. Are we now starting to see the beginnings of bear capitulation where the short-sellers throw in the towel and climb aboard the insatiable rise in markets? We read that 80% of all trading on US equity markets is now driven by algorithmic computer driven trading and Exchange Traded Funds (ETFs), both of which are focused on short-term inputs and are therefore susceptible to political hyperbole rather than longer term, fundamental, value-based methodologies. Perhaps this is why this area of the UK market has performed so poorly over the recent past.

We are not sure where this will all end. Most likely, as with all strong rallies, with a significant setback at some point. Many an experienced US investor has said ’Don’t fight the Fed’, referencing their ultimate power over interest rates and the US economy. Perhaps this should be amended to ‘Don’t fight the Trump’. He is moving and manipulating the markets for political purposes and there are 16 months of campaigning to go before the next election. He is formidably resilient and determined. Betting against him could cost you dear.

Markets mixed as investors look to G20 summit

Major equity markets enjoyed mixed fortunes after a choppy week’s trading the G20 summit in Japan dominated investors’ attention. The US S&P 500 index rallied late in the week but was unable to avoid returning a weekly loss of -0.3%. The UK’s FTSE 100 enjoyed a much more stable period, closing the week +0.2% higher.

The third estimate of first quarter US GDP was unrevised at a 3.1% annualised growth, however forecasts for Q2 growth are still at a slower pace and with Q2 earnings season approaching, analysts’ consensus forecasts suggest a second straight decline in earnings per share. Q1 earnings contracted -0.6% and analyst projections indicate a -2.6% decline in Q2, potentially bringing the first consecutive quarterly decline in three years. The ongoing trade wars are a key reason earnings are expected to be weaker.

President Trump made his mark on market sentiment with further criticism of the Federal Reserve and in particular chairman Jerome Powell. Stocks also appeared to move in response to mixed messages on trade developments; markets falling on Tuesday as Trump officials stated that no broad deal with China would emerge from the G20, then rallying on Wednesday as the US Treasury Secretary suggested negotiations were 90% of the way there.

European markets made gains, again after early-week losses; the exporter-heavy German DAX Index returned a weekly gain of +0.5% whilst the French CAC 40 closed +0.2% higher. Both rose strongly on Friday amid hopes that the G20 summit would ultimately ease trade tensions.

Further increased tensions between the US and Iran led oil prices to their highest level in a month, benefiting energy shares. India is a major consumer of Iranian crude oil who announced this week that it will halt imports from Iran and will look to the US and Saudi Arabia to fill its requirement going forward. Brent crude oil, the primarily European benchmark, rose +1.4% during the week to $65.47 per barrel at Friday’s close. Source: FE Analytics

The week ahead

Production indices (PMI's) are the standout releases from the UK this week although little change is expected to the mediocre numbers reported last time. The manufacturing and construction sectors are forecast to have remained in contraction whilst the services sector is likely to have recorded growth although it will be modest at best. In the US, the Institute for Supply Management releases its own PMI equivalents with the data likely to have deteriorated during June. The standout release from the country arrives on Friday in the form of the labour market report with unemployment forecast to have held firm at 3.6%. Job creation is expected to have topped 160,000, a considerable improvement on last time although below the average level seen over the last few years.

Updated unemployment data is also due in the Eurozone this week with retail sales released on Friday morning. In Asia, the standout numbers from China were already released this morning with official government PMI's little changed although there are no major updates from Japan on this occasion. OPEC also comes back into focus this week as it hosts its bi-annual meeting in Vienna. The Cartel looks set to extend its production cuts into next year due to concerns regarding global demand. Source: FE Analytics


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