Strategy: Trump Trade

The initial market reaction to Donald Trump's victory in November was startling. As the market expected a major fiscal easing together with financial deregulation in the US, equity markets rose sharply, while the USD and US yields soared (see chart below). This gave birth to new Trumpeconomics, Trumpflation, etc.

Markets left empty handed on concrete details on the new economic reform measures. Instead, the new Trump administration seemed busier, tweeting prolifically, implementing a controversial immigration ban and creating doubts about the US's relationships with important trading partners such as Europe, Mexico and China. With the market growing more impatient with Trump's economic policy agenda, the Trump trade rally fizzled out and equity markets and US yields have traded more or less flat while the USD lost momentum.

However, this may be about to change, as the Trump administration finally seems to be pushing forward with its economic reform agenda. First, he now has a Treasury Secretary following the US Congress's approval of Steve Mnuchin on 13 February after some foot-dragging by the Democrats. Concurrently, Trump has announced that he will provide details about his tax reform on 28 February. We can only guess about the size and nature of the reform but we believe it is likely to entail a combination of corporate and income tax cuts together with some elements of cross-border tax adjustment. In addition, the Trump administration has started dismantling the Dodd-Frank reform; last Friday, Trump signed an executive order asking the heads of the regulatory agencies together with Treasury Secretary Mnuchin to come up with measures in the next 120 days to deregulate the US financial sector to encourage more lending to the private sector.

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