Trump’s win may have opened a new chapter for the US. The shift toward a more balanced mix of easy monetary and fiscal policy and looser regulation is expected to jumpstart the economy, ending years of low growth and inflation. Faster US growth would also have positive spillovers to the rest of the world.
Risks remain that some of these growth-friendly policies are not implemented or have unexpected effects. But the biggest threat to growth is a possible protectionist turn, which would further depress already anaemic global trade.
Any political spillover in Europe would also be negative. The first risk event is Italy’s Senate referendum on 4-December. Polls suggest the vote will fail, and if it does, PM Renzi will likely resign. The sell-off in Italian assets indicates that this outcome is being priced, but as long as immediate elections and a eurosceptic government are possible, market stress can build further. Elections in the Netherlands, France and Germany next year will ensure that political risk remains a source of volatility.
In the coming weeks we will see the last ECB and Fed decisions of 2016. In Europe, taper talk is premature, and we expect a six month extension of QE. In the US, a rate hike in December is all but a done deal.
Markets have so far focused on the positives of Trump’s policies, with the dollar strengthening, rates selling off and equities rising, reaching all-time highs in the US. Several of these trends should continue in the coming months: the rates sell-off has some further room to run and the dollar should strengthen further, with the euro reaching parity next year and further weakness expected in sterling and yen.
David Folkerts-Landau, Group Chief Economist
Key pages this month:
P6 Reassessing global growth post US election P8 US growth upgraded P11 Deglobalisation risk P12 Italian political risk P16 Positive take from markets [more]