Whereas markets seem fixated on the first week in office of the 45th US President, data remains firm. Both leading and real-time indicators for the economy reflect steady momentum into the start of the year. Going forward, a new catalyst for market directionality might well come from Washington DC. Among the identified risks figure geopolitics and the perceived aggressive push for protectionism by the new US President. These risks are mitigated by expected announcements on tax reform, infrastructure spending and macro de-regulation.
Firm data appears to be the performance engine for risk assets at the turn of the year. The synchronised pick-up in PMIs reflected global growth momentum hitting a six-year high in January. Furthermore, the expected end to the earnings recession in the US and in Europe is materializing during the on-going Q4 reporting season. Once this momentum fades, new catalysts are likely to be found among the topics currently discussed in the US.
Risk assets are currently pricing-in stronger growth and US corporate tax cuts. Clearly, the expected tax reform, regulatory relief and infrastructure stimulus are supportive. We note that legislative policy will be negotiated between the White House and Congress over a period of months, not days. An important status update is likely to be given on February 28th when President Trump is invited to hold a speech before Congress.
In the meantime, details about the possible introduction of a destination-based cash flow tax reveal that large sales exposure to the US is a useful guide, but might be missing the point. Many of the companies with heavy revenue exposure to the US also have local manufacturing bases, with a significant proportion of the relevant costs in the US, and would therefore be a net beneficiary of the reduced taxation. It remains to be seen how trading partners will respond to the potential introduction of protectionist measures in the US -- the weight of the overall negative impact of new trade barriers will depend on the retaliation. Stay tuned.