The Market has been dealt a new hand; is it hidden Aces or Over-Trumped?

Waverton considers what the market is hoping for from the President Elect

Among the many, many interesting quotes attributed to Donald J Trump – one of the more pithy was “what separates the winners and losers is how a person reacts to each new twist of fate”.  Benjamin Graham’s Mr. Market, who is frequently diagnosed as a manic depressive, is one of those people as he digests the twist of fate that will deliver the new President to 1600 Pennsylvania Avenue on 20th January.  Mr Market seems to think he knows which will be the winners as shown by the market moves since the election.

Source: Factset/Waverton

Below we have discussed these moves and what might happen next.

Copper – up over 13% since the close before the election.

Known as Dr Copper for its historic ability to diagnose global economic activity, it is interesting that copper rallied hard into the election and continued its ascent after that.  The red metal is widely used in both construction and electrical wiring suggesting that Mr Trump’s 2,000 km of secure and floodlit wall could drive demand, as would a big pick up in housing starts.

Energy – Natural Gas up over 21% and Oil up 16.9%

The decision by OPEC to restrict output (admittedly shortly after many members hiked production) has been one of the reasons behind the resurgence in the oil and gas price.  Another, and perhaps the larger, is the prospect of further demand from more profligate consumers and industrial activity in the US.  As an Aberdeenshire businessman it was perhaps no surprise that he was decidedly pro energy in his campaign nor, indeed, that he was even more in favour of generating the confidence of the man on the street and small businesses.

Russia – up over 13%

His exaltation that he knew Putin but didn’t KNOW Putin may not have driven the MICEX higher but does make the continued protestations that Russia didn’t influence the election result somewhat more entertaining.  And he does KNOW that the CIA intelligence is false (just don’t ask how).  It’s more likely, however, that the Russian market’s strength is related to the country’s energy dependence and a correlated strengthening of the rouble but The Apprentice star’s clear intent to thaw relations with Moscow can’t hurt the market.

World Banks – up 16%

Since the financial crisis the world’s banks have been interchangeably painted as robbers, parasites and blood sucking octopi.  In investment terms they had become a pariah with the ever increasing cost of regulation aggravating the squeeze on their margins which came about as a result of rock bottom interest rates.  Whoever had won the election would have inherited a nascent rising rate cycle but Trump has suggested (on the few times he has spoken substantively about the sector) that he will dismantle the Dodd Frank regulations.  The market has taken this as a sign that, from now, the “octopi” can emerge from the shadows and march proudly forward.

Japan – up almost 11%

Japan’s Prime Minister, Shinzo Abe, was the first world leader to meet Donald Trump (and, indeed, his daughter Ivanka and her husband Jared) after the election result.  A friendly discussion about how the Trans Pacific Partnership Agreement was about to be discarded after 10 years of negotiations and Japan’s ratification is unlikely to have sent the market higher.  However, the rapid weakening of the Yen and a general improvement in industrial sentiment has certainly had that effect on an index that frequently reflects the Dollar/Yen pair trade or a proxy for global cyclicals rather than represents the outlook for a developed country of more than 120m people.

Financial markets have reacted very quickly to assimilate information about the new state of affairs under the Presidency of a man who has shown himself to be nothing if not a pragmatist and self preserver.  However, much of this information has been extrapolated from a very small number of data points/hopeful comments/midnight tweets.  Arguably some of the claimed improvements were coming through well before 8th November. It is without a doubt, however, that no President–Elect has made such an impact before their inauguration than Donald J Trump.  His first 100 days present a test to see if that continues, and if Mr Market has correctly identified the winners.

By George Palmer

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