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First Brexit, now Trump

Proshare

Thursday, November 10, 2016 8:57 AM / FBNQuest Research

Yesterday, the United States elected Donald Trump as its incoming President to replace Barack Obama, defeating the Democratic Party candidate, Hillary Clinton. The 45th President-elect will be sworn in on 20 January 2017.

Mr Trump’s victory sent shockwaves around the world akin to the morning after the UK Brexit vote. The initial sell-off in financial markets was primarily as a result of the uncertainty that was created by Mr Trump’s victory.

Although we have seen some slight recovery, it will take some time before the markets figure out what the new normal will be, mainly because of the policy vacuum that has been created in several areas.

The uncertainty is negative for markets in general, not just Nigeria. The longer term impact is more difficult to call at this stage.

The IMF in its latest World Economic Outlook (WEO) trimmed its forecast for global output growth this year by 10bps from three months ago, to 3.1%, while leaving next year’s unchanged at 3.4%.

The adjustment in the forecasts was partly linked to Brexit which in the IMF’s opinion had added to market and macroeconomic uncertainties in the near term. The risk that the IMF may moderate its growth projections further is higher following the US elections.

A Trump presidency is a shock to the system on several levels, the most significant being global trade.

The rhetoric that dogged his campaign was one which posed a major threat to existing and proposed trade agreements between the US and a number of its major trading partners. Tariffs were the blunt instrument of choice for Mr. Trump.

The reality is unlikely to be anything close to what the President-elect pushed for during the campaign.

Notwithstanding, the threat to China in particular is real, potentially risking further slowdown in growth. The slow response of China to congratulate Mr. Trump is telling.

The elections are likely to put the next Federal Open Market Committee (FOMC) meeting in December into sharper focus.

In the medium to longer term, Mr. Trump’s broad plans are more likely to worsen the US’s fiscal deficit, push inflation up and lead to dollar softening.

A rate hike by the FOMC in such circumstances is almost inevitable, posing further threat to the naira and foreign portfolio investments into Nigeria.

The case could be made that the FOMC may hike as the market had been anticipating in December anyway, despite the volatility that the markets are now experiencing.

This would bolster the view that Mr. Trump recognises and respects the independence of the FOMC, despite his unprecedented attack on the committee and its Chair during the campaign period.

Such a scenario playing out will confirm our suspicion that the rhetoric during the campaign period was just that. The markets may then breathe a sigh of relief.

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