Stockmarkets embrace Donald Trump vision

Global sharemarkets roared back and bond markets were sold off as investors embraced Donald Trump’s vision for the US.

Thew news of Donald Trump’s shock US election win looms large over the New York Stock Exchange trading floor yesterday.

Global share markets roared back to life while government bond markets were heavily sold off as investors embraced US President Donald Trump’s vision to reinvigorate the world’s biggest economy.

But analysts warned of significant risks to the outlook for growth in the Asian region that could add to the case for further interest rate cuts in Australia next year.

Australia’s benchmark S&P/ASX 200 share index surged 3.3 per cent to 5328.8 points — its biggest one-day rise in five years — amid massive gains in the technology, materials, healthcare, financials and energy sectors — adding close to $50 billion in market capitalisation.

The S&P/ASX 200 fell as much as 4.9 per cent to a four-month low of 5052.1 a day earlier as Trump’s shock US election victory became clear. At its low, the share index was 10 per cent below its August peak.

Benchmark 10-year Australian Commonwealth Government bond yields jumped 28 basis points to a six-month high of 2.5 per cent amid a similar sell-off in the US Treasury bond market due to Trump’s tax and spending plans and expectations that his trade and fiscal policies will drive up inflation.

The Australian dollar bounced from US75.80c to US76.80c as safe-haven currencies including the Japanese yen and the Swiss franc pared all of their gains after Trump’s victory speech. Spot gold dived from $US1337 an ounce to $US1270 before bouncing to $US1288. Elsewhere in Asia, Japan’s Nikkei 225 share index surged 6.7 per cent as exporters benefited from the pullback in the yen. China’s Shanghai Composite crept up 1.4 per cent.

Copper — which is regarded as a barometer for industrial production globally — was up 4 per cent in Asia, taking total gains to 12 per cent this week.

While the implied probability of an interest-rate cut by the Reserve Bank of Australia next year fell back below 30 per cent after spiking above 40 per cent the day before, economists warned that Trump’s policies added to the case for more interest rate cuts from Australia’s central bank, while also highlighting the need for fiscal repair in case greater spending is needed in the event of an economic downturn.

“While better US growth resulting from tax cuts or infrastructure spending has limited spill-over effects for the rest of the world, a US policy-induced trade shock will be negative for global growth,” JP Morgan Australia chief economist Sally Auld said.

“We think this underscores the risk that rates are likely to go lower in Australia because domestic growth needs to be stronger to provide an offset to external shocks, should they occur”.

A potential positive for Australia from a Trump Presidency could be stronger demand for commodities, as a result of US infrastructure spending. Still, JP Morgan’s Ms Auld cautioned that those policies would have a tough time being approved. Moreover the dynamics in the Chinese housing market and infrastructure spending will likely be a more important driver for iron ore and coal — Australia’s two largest exports — than US infrastructure spending. US steel production is less than 25 per cent of Chinese steel production, and the majority of US steel production is derived from scrap steel rather than iron ore, with most of this likely to be internally sourced.

However, the detail of Trump’s fiscal expansion matters for Australia, as infrastructure spending that lifts US economic growth should help emerging markets and commodities.

The RBA has estimated that on a final demand or value-added basis, the US is Australia’s largest export partner, given how much of US transformed imports from Asia start with Australia’s raw materials.

“This should be positive for the commodity story, but we hesitate from placing too much emphasis on this dynamic given the risk of protectionist leanings which blunt the infrastructure spill-overs to trade and the lags on infrastructure being too long to be material to the growth outlook near-term,” J.P. Morgan’s Ms Auld said.

HSBC Australia chief economist Paul Bloxham agreed that the threat of reduced global trade stemming from Trump’s protectionist policies was a risk to Australia’s economic outlook, although weaker Asian exports could mean more policy support for infrastructure investment, particularly in China, thereby holding up demand for hard commodities.

“What is clear is that the increased protectionism and isolationism engendered in the policy agenda is a downside risk for global trade,” HSBC’s Bloxham said.

Trump’s proposal include withdrawal from the trans-Pacific Partnership, renegotiation of the North American Free Trade Agreement and more stringent use of trade laws to protect American workers.

“Critically, Trump has also indicated that he intends to impose a 45 per cent tax on Chinese imports and to instruct the Treasury Secretary to label China a currency manipulator,” Mr Bloxham noted.

The effect on Asia could feasibly be “quite large”, given the region’s dependence on trade and particularly on exports to the US, with China bearing the brunt of Trump’s trade policy rhetoric.

“However, any move by the US to lift trade barriers against China could see the Chinese authorities respond with their own tariffs and restrictions,” Bloxham said. “China’s growth has become much less dependent on exports and more reliant on domestic demand since the global financial crisis.”

Overall, the election of Donald Trump as America’s next president meant there was an even greater imperative for Australia to improve its competitiveness, build on the China-Australia Free Trade Agreement and “recharge the fiscal cannon”, according to HSBC’s Bloxham.

“If global protectionism does rise, improved relations with major trading partners will be even more important. The China-Australia Free Trade Agreement ought to be a key priority as continued strong trade, financial and population links with China are critical to Australia’s ongoing economic growth.”