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NBK sheds light on markets' reaction to Trump taking the helm
January 22, 2017, 5:13 pm
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The past ten US presidential terms show that there is a tendency for markets to turn very optimistic and record gains at the end of the first 100 days of a new administration; a period called the honeymoon of the president.

This time, "as we went into Trump's inauguration, markets were rapidly disappointed by the speech of the new president (Donald Trump) that didn't waste any time and directly invoked protectionism and placing America first. The negative tone of the speech came as a surprise to many analysts who expected a more uplifting message relative to the campaign rhetoric, reads a report issued by the National Bank of Kuwait (NBK), shedding light on the markets' response to the events in the US.

This is why, for the moment, markets continue to fade the two months old Trump rally as a growing number of analysts have cautioned and voiced out that a trade war between the US and its major trading partners could be negative and likely to drag the global economy into a major recession. Locally, with the US economy approaching the Federal Reserve's dual mandate of full employment and price stability, Fed Chairwoman Yellen cautioned this week against allowing the US economy to run "hot".

With monetary policy still modestly accommodative, she mentioned that the Fed should continue to raise interest rates slowly. "I think that allowing the economy to run markedly and persistently "hot" would be risky and unwise," Yellen said. "I consider it prudent to adjust the stance of monetary policy gradually over time," she added.

Regarding the labor market she said: "In the coming months, I expect some further strengthening in labor market conditions as the economy continues to expand at a moderate pace." Yellen also suggested that the idea to expand the US economy with fiscal stimulus is preferable when there is more slack in the labor force. A fiscal support by President Donald trump could boost demand for workers in areas where labor is already tight.

That in turn, could fuel inflation, force the Federal Reserve to raise rates faster than expected, and increase the probability of another recession In parallel, the events in Europe did not provide any market excitement as the ECB left interest rates unchanged as expected with Draghi's statement and press conference after the announcement sent initially the Euro lower despite him saying that he didn't want to get drawn into the currency race to the bottom. His tone was however dovish with no mention of tapering.

The currency losses were later pared as markets digested what was said and realized that not much had changed. Perhaps Trump's statement that the "Strong dollar is killing us", also incited investors to move out of the Dollar even with Yellen remaining on the hawkish side. On a different sensitive topic as of late, the UK Prime Minister May stated this week that the country "cannot possibly" remain within the European single market, as staying in would mean not leaving the EU at all.

The speech confirmed the Government's intention to pull out of the single market when Britain leaves the EU, ending months of uncertainty and confusion following the June referendum. With her speech, May finally pulled the plug with a 12-point plan for leaving the EU, two months before she pulls the two-year exit trigger Article 50. She also announced parliament would get to vote on the final deal agreed between the UK and the EU.

In addition to Mrs. May's speech, Bank of England chief economist and member of the Monetary Policy Committee Andy Haldane admitted that the Bank was wrong on Brexit. Stating that If we were to look at how the British consumer performed in the course of last year, it's almost as though the referendum had not taken place.

On the currency front, the US dollar index opened the week at 101.47 and fell on Tuesday to a one month low of 100.26, after Trump said the US dollar is too strong and a weak Chinese Yuan was negative for the Dollar. The major events of the end of the week didn't help sending the dollar down to close on Friday at 100.81.

Sterling Pound started the week deep into negative territory at a 3-month low of 1.1979 against the dollar as fears of a hard Brexit gained control of the market. However, May's speech on Tuesday helped remove markets' uncertainties confusion, and helped squeeze out investors who were betting on another collapse of the currency. The currency soared almost by 2.6 percent the largest one day up move since 2008 after Prime Minister Theresa May promised a parliamentary vote on Britain's deal to leave the EU. The currency closed the week at 1.2374. 
 

Source: KUNA

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