Traders begin to position for Trump’s fiscal expansion

Traders are increasingly looking to position for key factors impacting the US and UK over the coming weeks. How will the announcement of Donald Trump’s fiscal expansion plan impact the markets? Will the UK finally trigger Article 50 as part of the move towards Brexit? Add in the political risk of Eurozone elections and this makes for some interesting market moves.  We consider how financial markets are positioned for the potential turbulence ahead, with a look at forex, equities and commodities.

Sterling and dollar

The economic prospects of the UK and US seem to be diverging and this could increasingly also have an impact on rate differentials and the prospects of their currencies. Both countries pulled off populist electoral surprises in 2016 with Brexit and Donald Trump the respective winners, and the reaction of the economies in the coming months will be intriguing. The initial reaction as sterling plummeted was for the UK to perform very strongly with the relative competitiveness of sterling benefitting. However sterling depreciation is beginning to drive up inflation and if the sharp rise in producer input prices proves to be a harbinger, then real wages are not going to remain positive for very long. UK Retail Sales are now beginning to fall quickly as Brexit starts to bite. Despite the rise in inflation, this will put pressure on the Bank of England to remain dovish which will dampen yields and pull sterling lower. Contrast this with the increasingly strong data out of the US. Regional Fed PMIs are surging, inflation is coming ahead of expectations, with rhetoric from Janet Yellen and Fed members is increasingly hawkish, and a “phenomenal” tax plan is imminent from President Trump. The market has only been pricing in two rate hikes in 2017 but could this be underestimating? The dollar has not really reacted yet to this tightening of Fed Funds rate expectations for the March meeting. Sterling and the US dollar could be set to move in diverging directions once more.

 

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