Can’t investors see that the next US president is completely untested in office, is an economic isolationist and a geopolitical accident waiting to happen? Apparently not. Or, rather, the investment world decided such worries can wait for another day.
The election of Donald Trump provoked only brief panic. The Nikkei index in Japan, a real-time barometer as results from the US states arrived, fell 5%, but European markets were calm. The FTSE 100 index, after a brief plunge, regained all the ground lost in the first hour of trading. The US dollar was broadly stable against major currencies, as was the US Treasury market.
There are several possible factors at work. First, even under a president who has never held elected office, dollar-denominated assets remain investors’ first choice as a safe port in a storm. Where else would the money go? China is at risk of trade tariffs under Trump. Japan is a land of no growth with an overvalued currency. The eurozone now faces its own political uncertainties in the form of an Italian referendum in December and elections next year in France, Germany and the Netherlands. After Brexit and Trump, the European continent’s establishment could be the next to feel the heat; if so, prepare for the next euro crisis.
Second, the first economic impact of a Trump presidency could be a mini-boom in the US. He has promised massive tax cuts and higher spending on defence and infrastructure. He may struggle to convince a hawkish Congress, even a Republican-dominated one, that it is affordable to slash the rate of business tax from 35% to 15%. But one has to believe that some version of the tax-cutting agenda will be enacted, bolstering short-term consumption and growth in the US.
Third, Trump dropped some of the rabble-rousing rhetoric in his acceptance speech. His words were anodyne. He did not mention trade tariffs, a wall along the Mexican border or deportations. There was encouragement for those who believe Trump in office will be a different beast from the candidate who saw gains in making outlandish statements.
Can the calm last? Surely not. The apparent enthusiasm for a “reflation trade” under a tax-cutting, free-spending Trump will be tested sooner or later. Risks are everywhere. Even a watered-down version of the promised trade tariffs would bring huge uncertainties, not least the possibility of sharp devaluation in the Chinese yuan, a prospect that was supposedly terrifying for financial markets at the start of the year.
For those who believe 45% tariffs on Chinese goods, and 35% on Mexican ones, could never happen, Neil Williams, the chief economist at fund managers Hermes, makes a useful point. “Super 301” powers under the 1974 Trade Act allow the president to impose tariffs without congressional approval on countries deemed to be engaged in “unfair” trade practices.
Meanwhile, Janet Yellen, the market-friendly chair of the Federal Reserve, could be defenestrated and nobody yet knows the makeup of the supporting cast around Trump.
The biggest danger, of course, remains foreign policy. Investors have been strangely happy to ignore geopolitical risks for years, but a US president who is vague about his commitment to Nato at a time of Russian expansionism is something entirely new and dangerous.
Such financial risks cannot be modelled neatly in an investor’s spreadsheet of corporate earnings, but their potential to overturn investment assumptions is real. For the time being, financial markets can shrug their shoulders at the arrival of President Trump and pretend he is a blank page. The complacency is unlikely to last.
Sainsbury’s may appreciate Argos distraction
The purchase of Argos would be a distraction, said critics of Sainsbury’s, but shareholders might appreciate some alternative entertainment at this juncture. The core supermarket business has become reliably dull: profits fall in a market that is always described as challenging, but it’s hard to say Sainsbury’s should be doing anything different.
The underlying pre-tax profit decline in the first half was 10% to £277m with like-for-like sales 1% weaker. The dividend, a flexible distribution these days, was also a 10th lower, a nod to the equally tough trading conditions expected in the second half.
The parallel Argos adventure, however, does at least offer the possibility of escape from the grind of squeezing out supermarket efficiencies. The challenge of integrating two large supply chains is formidable but the strategy itself looks low-risk. If cross-selling opportunities exist, great; if not, at least Sainsbury’s can bank a few cost savings. The plan is for the long term, which is perhaps why the share price is unexcited, but there is no evidence to date that Sainsbury’s management is about to drop the Argos ball.
Warning letter is the least Mike Ashley deserves
A stiff letter from the headmaster – aka Iain Wright, chairman of the business select committee – and a warning about future behaviour is the least Mike Ashley deserves.
The Sports Direct founder and chief executive, reports Wright, initially claimed an MP had planted the recording camera among the sandwiches during the committee’s now-famous tour of the Shirebrook warehouse on Monday. As explanations go, that was of the dog-ate-my-homework variety.
Wright says he will overlook Ashley’s lame excuse this time, assuming it was “a spur of the moment misjudgment,” but he still wants to know the full story. Quite right, too: the culprit deserves exposure for amateurism alone.
