Is this the end of the Trump trade?

Since the election of Donald Trump to the US Presidency, financial markets have reacted positively. Stocks have surged to record highs, the dollar index rallied to its highest level since 2003 and US Treasury yields jumped by 60 basis points to 2.4%, the highest level since 2015.

The revised view of a Donald Trump Presidency is that his fiscal largesse will spur growth in the US for many years to come, hence the rally in stocks and sharp increase in Treasury yields. Even the OECD has given the US the thumbs up to Trump’s growth plans, and expects the US to grow at the fastest pace of all large advanced economies next year.

Trump fails to lift Black Friday
Although the news flow is good for Trump’s expected economic policies, the markets may have run out of steam. US stocks are weaker at the start of a new week, and fears that the US consumer is starting to falter, after lower spending levels on Black Friday compared to 2015, suggests that Trump is not inspiring the all-important US consumer.

Why Trump could still boost US markets
However, although we expect the Trump-inspired stock market rally to slow, to answer our original question, we do not think that this is the end of the Trump Trade. Stocks tend to pullback once they reach record highs, as investors take a breather. Likewise, Monday’s pullback in Treasury yields could be a mixture of bond investor fatigue and rising global risks, which tends to keep Treasuries bid.

From an FX perspective, the decline in US Treasury yields has caused the dollar rally to temporarily stall, even though the buck has shown signs of life this afternoon. USD/JPY looks most vulnerable; it is still 0.8% lower today, after falling to a low of 111.36 at one point on Monday. The EUR and GBP are also weaker against the USD, after giving back earlier gains this afternoon. We think that the USD could continue to do well in the G10; however, it may struggle vs. the yen, as risk aversion could potentially rise ahead of Sunday’s Italian referendum (see more below.)

The focus shifts from Trump
Overall, the focus appears to be shifting away from Trump’s shock Presidential win, to political risk elsewhere, notably Italy. If Italy does not vote to change its constitution at its referendum on Sunday, then the market could be on high alert for the collapse of the Italian government, the potential collapse of Italy’s bank bailout program, which poses a risk to 8 of Italy’s major lenders. Overall, the outcome of Italy’s referendum could be bad news for risky assets globally, at least in the short term, which is another reason why the market is slightly cautious at the start of a new week.

In the short term, we expect some modest losses for US stock indices, along with a slow down in the pace of dollar strength. Overall, the Trump trade, which has been positive for US stocks and the dollar, could start to slow, but we doubt it will disappear altogether. As political risk crosses the Atlantic to Europe, this makes US assets continue to look attractive to traders.