In case you missed it, the makers of Toblerone have decided to alter the shape of their iconic chocolate bars in an effort to reduce costs. HOW DARE THEY?!?! Oh, and on a side note, the world’s largest economy has also just elected its next President.
After months of drama/comedy/action, Donald John Trump has gotten enough votes against Hillary Clinton to secure his spot as the 45th POTUS. Trump, who cut his teeth on real estate and other business interests, will be the first President without any experience in the military and in government.
What will his Presidency mean for traders like you and me? Let’s answer some of the more common questions of major market players:
What are his plans for the economy?
Trump’s campaign is notorious for its general, sweeping statements and not providing details. Based on his statements though, we know that basically, Trump wants to “Make America Great Again” by creating 25 million new jobs over the next decade.
He plans to do this by boosting infrastructure spending and enticing American companies to bring back jobs to the U.S. by cutting taxes, reducing regulations, and protecting Uncle Sam’s interest in trade agreements. We’ve taken a peek at his official website for more details:
Infrastructure
Trump wants to pursue an “America’s Infrastructure First” policy, refocusing the government’s attention from globalization to infrastructure. That increasing infrastructure is one of the easiest ways to create new jobs is a bonus. He plans to do this by streamlining permission approval processes and providing tax credits, all while promoting steel made by Americans.
Taxes
Trump has also promised to reduce taxes across the board, which should encourage companies to invest and provide more discretionary income for consumers.
The business tax rate is expected to fall from 35% to 15% while corporations are offered a one-time tax break to encourage them to repatriate hundreds of billions worth of profits stashed overseas. Trump is also promising to close tax loopholes for high-income earners and provide tax relief for families that need daycare.
Trade
In a nutshell, Trump wants to “negotiate fair trade deals that create American jobs, increase American wages, and reduce America’s trade deficit.” Right now his plans include pulling out of the Trans-Pacific Partnership (TPP), renegotiating the North American Free Trade Agreement (NAFTA), and calling out China for its unfair trade practices and currency manipulation.
What are his chances of getting these things done?
Pretty bigly. His party holds the majority in Congress, after all, which can speed up his reform plans. His biggest opponents and naysayers also look like they’re willing to give him a chance before they pounce.
Trump’s grandiose plans are not without their issues though! For starters, Trump’s Republican party is divided into blue-collar supporters and high-earning, not-so-disenfranchised business owners. This can get sticky when he tackles issues like regulations and tax cuts.
Trump’s plans to protect America’s trade interests are also in for a bumpy ride. Increasing tariffs on Chinese products, for example, would not only make imported products more expensive for American consumers but would also limit U.S. export growth if China (or any other trading partner) decides to do the same to U.S. products.
On a global scale, increased protectionism would make it even harder for export-based economies to boost their growth and inflation numbers.
Perhaps the biggest issue with Trump’s proposals is the lack of details on how he plans to fund them. Uncle Sam is already dealing with a ballooning budget deficit and, unless Trump backpedals on his promises to cut taxes significantly, then the government might have to push for a higher debt ceiling. Duhn duhn duhn.
How did market players react?
Equities traders cheered the news, as tax cuts would mean more profits for American companies.
Bond traders reacted by selling U.S. Treasuries, as Trump’s plans to massively increase infrastructure spending would likely lead to more government debt and higher inflation.
Remember that higher inflation would decrease the value of coupon payments and that lower bond prices usually translate to higher bond yields.
Last but not the least, forex traders reacted by buying the dollar like there’s no tomorrow. Not only do higher U.S. Treasury yields increase the demand for the dollar, but higher inflation prospects also make it easier for the Fed to raise its interest rates further.
Overall, it looks like market players are choosing to focus on the impact of Trump making good on his promises to increase infrastructure spending and cut taxes. Sentiment might change (for good or bad) over the next couple of days or as we get more details, but for now, you can bet that big changes are coming.