Trumpflation

Market Trends - 24/01/2018

The Effect of the Rational Leader


A new term that now becomes a case study in economic books is Trumplation. Everyone can understand where it is coming from. Everything started once Trump got elected president in the USA in November of 2016.

It means higher interest rates in the U.S. It means the end of stimulus and the QE. It signals the end of negative and zero interest rates in Europe and Japan. It potentially means tariffs that will make prices of goods imported into the U.S. more expensive. And, if President Donald Trump gets his fiscal stimulus past the deficit hawks in congress, it means more money for the economy which could lead to wage inflation. No American worker will complain about that.

That is why investors study how to prepare their portfolios for inflation. Inflation wears down the value of capital. Americans haven't dealt with inflation for so long now that it may be something lay investors forget. Trump's promise to invest in American infrastructure and "strike deals" with multinationals looking to relocate to Mexico may be good for American employees of those companies, but the goods they produce are going to cost more money.

In the case inflation hits 3.5% and all indicators are that it will go even higher, how much of a premium to this number should an investor be paid for tying up his money for 10 years?

Overtime, with inflation, equities are the overweight decision. This is one of the main reasons why the Dow keeps breaking records. And those that are underweight equities, will have to look for smart entry points as the market is in overbought territory, meaning investors are buying at a high.

Equities are off to a strong start for the year, with the three major US indexes rising at least 6% in January. Stocks are building on the strong gains made in 2017.

Lower corporate tax rates under Trump first signs show that they help American businesses, which is one of the reasons behind the bullish momentum. It also encourages investment and growth, but the impact is expected to be less immediate.

The UK Could Come out Stronger than Before


Executives and lobbyists suggest that Frankfurt and Paris are set to see a drop rather than a wave of London bankers dislocating in 2018, with the prospect of a softer Brexit discouraging them from leaving Britain immediately.

The two European cities had been positioned to benefit as Britain prepares to leave the European Union, prompting London banks to seek a base elsewhere within the bloc in order to continue taking full advantage of the EU single market.

The signals from British Prime Minister Theresa May and progress in talks with Michel Barnier, the European Commissioner’s chief negotiator, have prompted some banks to delay large staff moves, at least for now.

Frankfurt’s chief promoter, Hubertus Vaeth, had expected up to 6,000 new arrivals in Germany’s financial capital this year in the event of a hard Brexit.

On Monday, Germany’s European Union commissioner, Guenther Oettinger, said to an audience of financiers at Deutsche Boerse, the Frankfurt stock exchange, raised the possibility that Britain might not leave the EU at all.

The developments have prompted a change of heart at Deutsche Bank, which had originally examined moving up to 4,000 staff from London. As per the rumors it will now initially shift less than 200 jobs.

In Paris, a similar picture is emerging.

France has stepped up efforts to attract London banks to Paris preparing for Brexit after President Emmanuel Macron’s election. He has begun to make labor law more flexible and has offered some tax cuts.

Among most recent announcements, Goldman Sachs Chief Executive Lloyd Blankfein said in November the bank would have hubs in Frankfurt and Paris after Brexit and that it would be up to staff to decide where they want to move to from London. A person familiar with the bank’s strategy said that in the beginning only dozens of staff might move.

Even French bankers based in London are not rushing to return.

“There is no hurry for us,” said Frederic Oudea, chief executive of Societe Generale, when asked about moving staff from London to Paris. France’s third-largest bank has said that it plans to move up to 400 people.

“The good thing is that there has been an agreement on a divorce settlement which means that there is more time,” chief executive of Societe Generale told Reuters at the World Economic Forum in Davos. “At this stage we have not moved people. We can wait to have more clarity.”

Banks could be unlikely to follow their initial schedule to transfer certain activities by September 2018, given that they believe Brexit negotiation would now take more time.

The final outcome of the talks is anything but certain, and a hard Brexit - in which the UK would lose full access to the EU single market - cannot be ruled out. But positive signals from regulators and politicians in Britain have nonetheless encouraged banks.

Speaking from Davos, one senior banker said he had been reassured at a meeting he attended with May in Downing Street this month, that the future of financial services was a core government priority.

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