Donald Trump as US President – the economic
and financial implications
Mikael Olai Milhøj
Senior Analyst
[email protected]
Thomas Harr
Global Head of FICC Research
[email protected]
Jakob Ekholdt Christensen
Chief Analyst, Head of EM Research
[email protected]
Christian Tegllund Blaabjerg
Senior Strategist
[email protected]
Arne Lohmann Rasmussen
Chief Analyst, Head of FI Research
[email protected]
Stefan Mellin
Senior Analyst
[email protected]
Kristoffer Kjær Lomholt
Senior Analyst
[email protected]
Jens Nærvig Pedersen
Senior Analyst
[email protected]
9 November 2016
Follow us on Twitter @Danske_Research
Investment Research
www.danskebank.com/CI
Important disclosures and certifications are contained from page 23 of this report.
Key takeaways – macro and politics
1
Key takeaways – market implications
Trump as President
EUR/USD
EUR/SEK
FX
EUR/NOK
EUR/DKK
vs selective LATAM, Asia and CAD
Equities
Higher EUR/USD short and medium term. EUR/USD set to rise to 1.131.14 in the coming days. Our 12M forecast remains 1.15
EUR/SEK could reach 10.10-10.20 on a knee-jerk move. The SEK to
stay weaker for longer on weaker risk appetite, Riksbank December cut
Near-term higher towards 9.30-9.40 on negative risk appetite, year-end
seasonality, liquidity. Bearish EUR/NOK in 3-12M
Short and medium term limited impact. Long-term, a more
protectionistic US could hit DK's CA and thereby the DKK
Positive for USD.
USD/MXN set to reach 21.5 in the days after the election
Global equities
Knee-jerk 5-10% sharp fall across markets but sell-off to be short-lived.
Regional
US set to outperform eurozone and EM.
Sector performance
Fixed Income US yields
Positive for industrial and basic materials,
Energy and healthcare could rally
10Y UST yields set to fall around15-20bp and bund yields to fall in days
after the election.
Medium term, higher UST yields
2
A regime shift in US policy but uncertain how
Trump will act as President
Election result
• At the time of writing, Donald Trump seems to be the new US President.
• The Republicans have retained the power of both the House and the Senate, implying that it
will be easier for Donald Trump to get his policies through.
• The electors are due to meet in their state and vote for the President and Vice President on
19 December.
• Congress is due to meet in a joint session to count the electoral votes on 6 January 2017.
• The inauguration of the new President and Vice President is due to take place on 20 January
2017.
Source: https://www.archives.gov/federal-register/electoral-college/key-dates.html
4
Trump stands for a significant regime shift but actual changes
should be more modest
• Based on his policy proposals, Donald Trump stands for a significant regime shift in US policy.
• However, we think actual policy changes should be more modest due to likely resistance from
Congress, even within the Republican Party. Still, Trump’s room for manoeuvre is larger as the
Republican party will also control Congress.
• In the short term, we do not expect growth to be hit by Trump uncertainties through lower
confidence and hence we expect the economy to continue to grow around 2%.
• Fiscal boost to growth is likely to be offset by a more hawkish Fed.
• In the medium to long term, uncertainty is set to rise but we think the negative effects of more
protectionism and tougher immigration policy will dominate the possible positive effects of
less regulation, lower taxes and infrastructure spending.
5
US government debt set to increase due to higher budget deficit
US government debt set to increase
115 % of GDP
110
CBO baseline projection
Fiscal baseline scenario
Fiscal adverse scenario
105
100
75
2017
2019
2021
2023
US public debt to increase significantly in coming decades
160 % of GDP
140
120
100
80
60
40
US public debt,
CBO baseline projection
20
Source (both charts): CBO, www.donaldjtrump.com, Danske Bank Markets
2046
2043
2022
2019
2016
2013
2010
2007
2004
2001
1998
0
1995
• US public sector needs to reform as projected fiscal path is
already unsustainable in the long run.
2025
2040
• Less rosy assumptions imply that debt will increase more
(slower growth, lower fiscal multiplier, higher rates).
80
2037
• As a result, the US could over the medium- to long-term lose the
last two of its ‘AAA’ ratings (has already lost one).
85
2034
• Using a simple debt model and assuming Trump gets all his
policy proposals through (which we, however, do not think will be
the case), the US public net debt could increase to above 95% of
GDP in 10 years from about 75% today.
90
2031
• We doubt he can get all his economic plan through but the
Republican dominance of Congress makes it more likely.
95
2028
• Very difficult to estimate the actual effect of Trump’s economic
plan but we should expect a much more expansionary fiscal
policy. We are doubtful he will manage to balance the budget
within eight years through dynamic effects as he has suggested.
US public net debt
2025
• Trump has promised to ‘at least double’ Clinton’s infrastructure
spending, implying at least 0.6% of GDP per year, and suggested
tax cuts of USD3,000bn (1.6% of GDP per year): in sum, fiscal
easing of at least 2.2% of annual GDP.
6
US to become more protectionist – Trump wants to renegotiate
free trade deals to get better terms
Lower US potential growth in case of more protectionist policy Trump wants to shield US workers from globalisation
• Trump is substantially more hawkish against free trade.
Furthermore, he believes that unfair trade practices by other
countries (especially China) are also harming US companies.
• He wants to bring manufacturing jobs back to the US by
embarking on a seven-point trade policy plan.
1.
2.
3.
4.
5.
6.
7.
8.
Withdrawal of the US from the TPP (Trans-Pacific
Partnership).
No comments on TTIP but given Trump’s protectionistic
stance it does not bode well.
Appointment of tough US negotiators.
Identify all trade agreement violations and seek to end
them.
Renegotiate the NAFTA (the North American Free Trade
Agreement) to get ‘a lot better terms’ and, if not feasible,
withdraw from it.
Label China as currency manipulator.
Bring trade cases against China both in the US and WTO.
If China does not cease the practice under (6), Trump
would use clauses under various trade acts to remedy the
disputes.
• There is a risk of a global trade war if other countries
retaliate. While the US is a large and less open economy
compared with, e.g. Europe, a more protectionist stance
would lower US potential growth in the long run.
Source: www.donaldjtrump.com,
Source: BLS, BEA
7
Trump likely to replace Yellen with a more hawkish Fed chair
• Through the election campaign, Trump shifted stance and most recently he criticised the low
interest rate policy. Says the Fed has created ‘a false stock market’ and that Yellen is ‘very
political’ as rates are low because of Obama.
• We expect Trump to replace Fed Chair Janet Yellen in 2018, as she is a Democrat. Such a
move is very unusual in an historical perspective.
• Trump is likely to appoint more hawkish Governors. Trump is against a low interest rate policy.
• We still expect the Fed to hike in December, as we expect financial markets to recover before
the December meeting and do not expect a major impact on confidence indicators in the short
term.
• We expect the Fed to hike twice in 2017 in June and December (i.e. a total of three hikes from
now until year-end 2017) to offset fiscal boost to growth in 2018.
8
Potential regime shift in US foreign policy under Trump
• As Commander in Chief, US President has more power in foreign affairs.
• China is the main enemy, not Russia.
• Improving dialogue with Russia.
• Act as a negotiator in the Syrian conflict and let Russia do the ground job.
• NATO members would be asked to contribute more to NATO if their contributions are below the 2%
threshold. This could create possible friction within NATO.
• More sanctions on Iran versus more support of Israel.
Trump likely to put pressure on NATO members to contribute 2% in line with NATO guidelines.
4
Defence expenditures as a share of GDP
(based on 2010 prices and exchange rates)
3.5
3
2.5
NATO Guideline 2%
2
1.5
1
0.5
0
Source: Nato
2016E
9
Trump substantially more hawkish versus illegal immigrants
• Trump has suggested a much tougher line against illegal immigration. Has said that legal
immigrants are welcome and will receive fair treatment.
• We do not think his plan to build a wall along the Mexico border to prevent illegal immigrants
is realistic.
• However, more realistically, we think he will take measures to reduce illegal immigration and
to send home criminal immigrants.
• For national security reasons, he will increase screening of each individual entering the
country, especially from troubled parts of the world. Has suggested a temporary suspension
of immigration entirely from regions where safe and adequate screening cannot occur.
• Immigrants account for a large share of the total labour force and low-skilled immigrants
usually work in low-skilled jobs (manufacturing, transportation, home services). Depending on
how much of his policy Trump can get through, a more anti-immigration policy would be
negative for potential growth in the long run.
10
FX – weaker USD versus G10; stronger USD
versus EM
EUR/USD – higher short term and in 2017
• EUR/USD has risen above 1.12 on the announcement that Donald
Trump will be the next US President. We expect that EUR/USD could
rise a bit further near term to 1.13-1.14.
The eurozone-US CA differential is at its widest level in the
history of the eurozone
• Larger fiscal expansions, which can be expected under Trump, have
historically tended to drive USD weakness. The exception was Ronald
Reagan’s first term in 1981-84, when Fed chairman Paul Volcker
raised policy rates sharply, supporting the dollar. We do not expect a
sharp rise in real policy rates under Trump’s presidency.
• Fundamentally, the large eurozone-US current account differential and
the undervaluation of the EUR should support EUR/USD in 2017.
• However, we expect the Fed to raise interest rates in December and
twice in 2017. This, together with political uncertainty shifting back to
the eurozone, should mitigate EUR/USD strength in 2017.
• In sum, we forecast EUR/USD to reach 1.15 in 12 months.
Fiscal expansions have tended to drive USD weakness
9 November 2016
Danske Bank’s G10 Medium-term Valuation (MEVA) Model
indicates EUR/USD at 1.26 in the medium term
Source (all charts): Macrobond Financial, Bloomberg, Danske Bank
12
Markets
EUR/SEK set to stay at high levels into year-end
• Mr Trump’s previous advances in the opinion polls sent markets into
risk-off mode. The responses in FX were as expected: the USD on
the defensive vs true safe havens like the JPY and more specifically
the SEK under pressure vs the EUR. EUR/SEK surged after the
dovish Riksbank message, but the continued rise also had to do with
sour risk sentiment. Risk appetite turned for the better just recently.
Risk-off mode to push EUR/SEK higher
• EUR/SEK remains negatively correlated with ‘risk’ and equities. In
our view, the pre-election trading pattern gives an indication about
what may happen now that Trump has won. But then with a greater
magnitude, that is, bigger selloffs in the stock market and a sharp
rally in EUR/SEK.
• EUR/SEK has broken 10.00 as expected. Technically, the pair is
already in unchartered territory, and EUR/SEK is likely to reach
10.10-10.20 as a knee-jerk reaction and stay weak into year-end.
EUR/SEK at elevated levels
• A Trump win could in a sense be like Brexit, hence weigh on markets
but also be a headwind for the global growth outlook. As such, it
could indirectly affect the Riksbank in a negative way. We expect a
rate cut in December to have a negative impact on the SEK. A Trump
win may make matters worse for the krona, in our view.
• The longer-term outlook is not easy to evaluate, but the protectionist
policies proposed would arguably be bad for global growth and have
negative repercussions for a small open economy like Sweden.
• As we think the USD would come under pressure as well, the effect
on USD/SEK is less clear cut. The one-month daily return
correlation between USD/SEK and S&P 500 is close to zero
(marginally negative, in fact).
9 November 2016
Source (both charts): Macrobond Financial
13
EUR/NOK – higher near term but no game changer
• Deteriorating risk appetite and higher global uncertainty are negatives for
the oil price and the NOK short term; especially given the ‘Trump risk’ repricing at the beginning of this week.
Oil /risk sentiment set to lift EUR/NOK short term
• However, we see a range of factors limiting the EUR/NOK upside potential.
First, markets pricing in a lower probability of a December Fed hike is likely to
counter the extent of the risk sell-off. Also, the weaker USD (USD/NOK to
move lower) and an adjusting oil supply side would still contribute in lifting the
oil price towards our longer-term anchor of USD58/bbl by end-2017. As the
US makes up only a limited share of Norwegian exports, more protectionism
should primarily hit Norwegian growth indirectly, and as such we do not think
the US vote will have any influence on the economic policy outlook in Norway.
• In summary, heightened uncertainty, a lower oil price and year-end
seasonality are likely to send EUR/NOK a little higher near term than
previously projected (9.30-9.40 in 1-2M). For 2017, however, we do not see
the story as much changed and we still expect the long-term fundamentally
overvalued EUR/NOK (and USD/NOK) to move lower, supported by real
rate differentials normalising in the next 12M.
Year-end seasonality has historically been a NOK negative
9 November 2016
US makes up a limited share of Norwegian exports
Source (all charts): Macrobond, Bloomberg, Danske Bank Markets 14
Trump could weaken strong DKK fundamentals
Denmark’s CA with the US is more than 1/3 of total surplus
• Currently, Denmark holds a current account
surplus of 3.5% of GDP versus the US (more than
a third of total surplus); hence, strong income flow
from the US has been a strong DKK fundamental
in recent years.
• Donald Trump’s view on free trade could be a
threat to the Danish shipping industry (which
makes up a third of Denmark’s total current
account surplus). The election of Donald Trump
could therefore have a negative impact on
Denmark’s external balance, which would create a
fundamental headwind for DKK over the long term. EUR/DKK set to trade at low end of historical range on 1-12M
• Note, that Democrat Bernie Sanders has been
taking shots at medical sectors in the US, which is
a further threat to DKK’s strong fundamentals.
• In the short and medium term, political risk in
Europe and high structural savings in Denmark
are likely to be more important for DKK and both
factors support DKK and our view that EUR/DKK
will trade in the low end of the historical trading
range on a 12M horizon.
Source (both charts): Macrobond Financial
15
Trump could spell trouble for EM
More aggressive US trade and foreign policies would be negative
for emerging markets
Several EMs are vulnerable to more protectionistic US trade
• The possible withdrawal of the US from TPP
and renegotiation of the NAFTA to get ‘a lot
better terms’ (or full withdrawal from it) would
be negative for notably Mexico and several
Asian countries.
• Trump could also target China, possibly labeling
it as a currency manipulator and bring trade
cases against China both in the US and WTO.
• More aggressive trade action by the US could
prompt retaliation by China and other countries
and risk triggering a global trade war.
• On foreign policy, Trump is likely to stir frictions
within Nato. Trump has signalled that he wants
other Nato members to raise their contributions
to 2% of GDP — this could weaken Nato in the
short term, being negative for eastern European
EMs.
policy…
20 % of GDP
TPP
Net exports to the US
15
10
NAFTA
Unilateral
5
0
-5
1990
2015
…and global trade would plummet if other countries retaliate
against US trade measures.
Source (both charts): Macrobond Financial
17
USD stronger versus most EM currencies
• USD/MXN has risen sharply on Trump’s win and we think it may rise further to 21.5 in the next
few days, given its large trade share with the US and Trump’s sharp rhetoric. However, the
Mexican central bank may hike rates to stabilise the currency. Longer term, the USD/MXN will
depend on how aggressively Trump will be towards trade with Mexico.
• Asian and other Latin American countries and currencies (MYR, VND, KRW and BRL) could also
be negatively affected to some extent by the Trump victory.
• Other EM regions, notably eastern European EMs, are far less exposed given that their main
export markets are European countries. However, frictions within Nato could weigh on PLN and
HUF.
• Russia and RUB could be a relative winner among EM in the near term. We think that Russia
would benefit from a more positive investor reaction in the short term given Trump’s relatively
positive view, though we see a smaller effect in the longer term given concerns in Congress. A
Trump win support our bullish view on RUB.
• China and CNY may be targeted in the short term by the Trump administration, but we do not
think that the US can afford to maintain a hawkish stance in the medium term on China, given the
importance of the Chinese market for the US. Hence, upward pressure on USD/CNY is set to
persist over the next 12 months, supporting our current 12M target for the USD/CNY of 7.10.
18
US rates – lower short term; higher medium term
Yields: temporary flight to quality, but yields set to head higher longterm
− We expect as a part of a general flight-to-quality that
treasury yields will be pushed lower over the next couple
of days after the Trump win. A move of approximately 1520bp lower in 10Y Treasury yields is likely. Bund yields
are also expected to move lower and periphery spreads
could widen further.
After the Trump win, we see some upside for US 10Y rates in
2017, but temporary flight to quality (DBM forecast)
− But medium-term market focus could turn to the possible
inflationary consequences if Trump moves the US in a
more protectionist direction.
− Also, there will be focus on Trump’s likely fiscal boost
resulting in a bigger budget deficit and more bond supply.
It could also create focus on the US credit rating, though
the 2011 downgrade by S&P did not lead to a US
Treasury sell-off as the US market is still the world’s
biggest and most liquid bond market.
− The Trump win creates uncertainty about whether Yellen
will be reappointed for a second term. The market will
focus on whether Trump will be able to move the Fed in a
more hawkish direction by appointing ‘hawkish’
governors. Note that we still expect the Fed to raise rates
in December and twice in 2017, supporting higher yields.
Source: Danske Bank Markets
Long-term upside risks for yields due to Trump’s fiscal plans
115 % of GDP
US public net debt
CBO baseline projection
Fiscal baseline scenario
Fiscal adverse scenario
105
95
85
− All in all, we keep the view that US 10Y yields will
continue to edge higher in 2017, irrespective of a
possible flight-to-quality move lower in the short term.
75
2017
2019
2021
2023
2025
Source (both charts): Macrobond Financial, CBO, Danske Bank Markets
20
Equities – a knee-jerk fall; US to outperform
Europe and EM
Trump wins presidency – Republican congress
Equities
Trump as President
Economics
Neutral for growth short-term; moderately negative medium- to long-term. Boost via
fiscal policy but countered by protectionism and hawkish immigration policy. Fed
forced to premature tightening. Higher EUR/USD short and medium term, but USD to
strengthen vs EM and MXN in particular.
Global equities
Knee-jerk sharp fall of 5-10% but sell-off to be short-lived
Regional
Change to Overweight US. Underweight EU and Nordics.
Sector
Overweight Health care, Financials, Industrials, Energy, Basic materialsUnderweight Renewables.
Sector Nordics
Overweight Health Care, Energy, Industrials.
Underweight Renewables, Consumer Staples, Telecom services.
Nordic Shares
Companies likely to benefit: Novo Nordisk, Astra Zeneca, Coloplast, Nordic
energy, Volvo, Atlas Copco.
Companies likely to suffer: Vestas, Dong, Novozymes, Maersk and DSV.
Disclosures
This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S (‘Danske Bank’). The authors of this presentation are listed on the
front page.
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