Wondering how markets will perform under Trump?
Of course you are.
Since no one is sure exactly what the ubiquitous “first 100 days” will bring, it’s probably best to explore a range of possible outcomes. The fate of the reflation narrative will take center stage over the next couple of weeks as we find out whether the year’s most crowded trades still have room to run (of particular interest is the massive Treasury short).
Below, find a handy table from Deutsche Bank which posits three possible scenarios and explains how various assets are likely to respond to each.
Via Deutsche Bank
We consider three distinct scenarios with the view that markets may veer towards one of them over the course of 2017:
- Reflation (or normalisation): President Trump’s economic plan rebalances the policy mix laying the ground for strong US growth, inflation and higher rates/steeper yield curves. However, the “America first” approach may have negative repercussions for Europe.
- Trump disappointment: Markets are disappointed by details of the economic plan, and give back, at least partially, the gains achieved since the US presidential election.
- Disorderly rates sell-off: Markets perceive President Trump’s policies as stoking inflation, and the Fed turns prematurely hawkish. This double whammy leads to a significant rates sell-off over a relatively short period of time, somewhat like the experience of early 1994.
The table below provides a qualitative idea of how different asset classes may react in the three scenarios