Equities continue to back Mr Trump, bonds may be slightly more wary.

Equity markets continue to put their faith in Donald Trump, as other asset classes may be showing signs of caution. It is remarkable to think that 2 months ago, the idea that Donald Trump could be inaugurated in 7 days’ time struck fear into equity markets. The possibility, no matter how small, that he could not be would now likely be considered even more disastrous.

Post, what can probably best be described as a colourful press conference, which offered little in the way of insights into how Mr Trump intends to drive the economy forward with a more liberal fiscal policy. It did seem to continue to reignite his battle with his own security forces. Equities did wobble, but regained a lot of their losses. However other assets classes may be showing more signs of caution. The yield on 10 year US treasuries, having reached a peak of 2.55% a few weeks ago, fell back to close just over 2.3% on Thursday. The value of the Japanese yen against the US dollar has increased recently, another sign speculators may be looking to take some risk from the table.

As much as analysts now triumph the possible arrival of the reflation trade, which will lead investors to finally sell bonds to buy equities. Those investors who have owned equities for the past 8 years, when many were so sceptical, may well have been tempted by the lure of the recent rise in yields as they look to protect gains in the face of all this political uncertainty.

 Mr Carney expressed the view on Wednesday, in front of the House of Commons select committee, that he now believes that Europe has more to fear from Brexit than the UK does. He was surprised that the UK economy slowdown he forecast had not materialised. For a man who works in the heart of the city of London, he now acknowledges the important position the UK financial services industry has in the global economy.

Mr Carney takes some of the credit for the better than he expected performance of the UK economy, on the swift action the monetary policy committee took in August. We did question at the time whether their actions were justifying such comments as “the Brexit debate has pushed up uncertainty to levels not seen since the euro crisis”. The question would seem to be now, if they did underestimate the Brexit impact will they look to reverse Augusts measures?

The Bank of England’s next interest rate meeting is not until the start of February, it is unlikely that economists will predict a reversal at that meeting. However, the release of the minutes from the previous meeting along with inflation report are released at the same time, that should give some insights as to whether some members are of the view that August’s decision should be reversed. Time for Mr McCafferty to re-appear perhaps.  

Posted on January 12, 2017 .