Deutsche Bank Weighs In On Trump

Here’s Deutsche’s George Saravelos:

It will take a very long time to understand the implications of a potential Trump presidency. Big picture, it re-enforces the world’s shift away from globalization, a theme we extensively wrote about yesterday. In the short-term, the market will likely focus on the following three markers: Trump rhetoric. Does the potential president-elect sound “presidential” today? Are there signs of moderation in policy, particularly its most controversial aspects on foreign policy? How quickly do we find out about presidential appointments, to the post of Treasury secretary in particular, and are they credible? Data. There is an unambiguous rise in policy uncertainty and the key question is how much does this impact near-term US and global growth. Both the Fed and the markets will be closely scrutinizing upcoming releases, but we will have to wait until the week of November 21st for the first business confidence surveys (Markit PMI). Chair Yellen. It is reasonable to assume that the Fed may put December rate hike preparations on hold until more clarity is reached on the data, but even more importantly the market will be looking for confirmation that Chair Yellen will not resign. Trump has been particularly critical of her term so policy continuity will be particularly important. As far as the dollar goes, there is a clear tension between the negative impact of lower Fed expectations, higher uncertainty and risk premium on US assets compared to the positive implications of Trump’s fiscal and corporate tax programs on growth and corporate tax repatriation. We view the impact as unambiguously negative for EM currencies. Risk-aversion near-term but prospects of higher US yields medium-term both work against EM. The big rise in EM inflows over recent months paints a worrying backdrop. For developed market currencies the tension between lower Fed expectations near-term but a more positive fiscal story medium-term is balanced enough to keep our forecasts and medium-term dollar bullish outlook unchanged. The one exception to our dollar positive forecasts is USD/JPY, where we view both the Asian geopolitical and risk-aversion impact as sufficiently strong to re-enforce our conviction on our year-end target of 94.