The early days of Trump’s return and market reactions

Given the global focus on the return of President Trump to office, we want to take stock of the first few days. It’s certainly premature to reach any firm conclusions, but there are a few points to make.

First, the administration has hit the ground running, with a flurry of executive orders addressing the concerns of key constituents on issues like immigration, diversity and inclusion and the environment. With control of Congress and a better understanding of the levers of power than might have been the case in 2016, you’d guess that the President is better placed to advance his agenda. 

Second, we have already begun to see some faultlines within the administration – for instance on the question of high-skilled immigration. As you’d expect, there are a range of views within the administration and that will likely lead to policy uncertainty.

We heard less on tariffs in the first few days than we might have expected. The administration has so far taken a more measured approach (even if it has only been a few days) than some might have feared, and we think that’s helped European equities. Despite that, we’d expect to see trade policy ramp up over the coming months. Still, the US could probably take a targeted approach and use tariffs as a negotiating tool, but tariffs continue to represent a risk for inflation and growth.

Also, the President declared a national energy emergency – aiming to encourage domestic energy production to bring down prices. As you might have expected, oil prices drifted lower this week. At first glance, however, driving energy investment might not be so straightforward. The prospect of lower prices might discourage private companies from investing more and subsidising that investment could be expensive for the government. It’s also worth noting that industrial energy costs in the US are already relatively low, well below the costs in the UK or Italy.

One area where the focus on energy might be very relevant is around data centres. We continue to see high levels of spending on power-hungry data centres, particularly for Artificial Intelligence. If that drives significant growth in energy consumption, then the case for even cheaper energy becomes more compelling, but even more challenging to achieve.

The legislative process will take time. We’re already beginning to see the legal challenges to some of the proposals, and it’s important to remember that the Republican majorities in Congress are small. 

We’ve seen some energy on foreign policy. We already saw a new impetus in the Middle East (even before the President took office) and we may see moves towards a ceasefire between Russia and Ukraine. There are clearly any number of challenges here, but if we do see progress we think that would be positive for sentiment, and European equities in particular could benefit.

But we didn’t hear much on monetary policy in the first few days of the new Presidency. In his speech at Davos, the President did call for an immediate cut in interest rates, both in the US and around the world. At various points during the campaign, concerns arose about the Federal Reserve’s independence in setting interest rates. We believe any shift in this approach would likely have been met with a negative reaction from the markets. That said, we shouldn’t overstate the significance of the remark – it’s certainly not the first time that a President has tried to signal his preferred monetary policy. It’s a topic we’ll continue to follow. 

How much does this all really matter? It’s a fair question. Financial markets have been fairly calm this week, but maybe that also reflects a fairly strong start to the earnings season in the US.

Nonetheless, early policy announcements and executive orders can give a sense of the direction of travel – and financial markets will react to that. But we’re still some way off from seeing the details. It seems pretty clear that government policy really does matter for markets: just look back at the response to Covid. 

So, we think it’s challenging to assess the impact, but it’s still worthwhile to try to look past all the noise and assess what all these pronouncements might really mean for financial assets.