Markets give muted reaction to Donald Trump speech

Financial markets gave a relatively muted response to Donald Trump’s inaugural speech as US president, with US stocks holding in sight of record highs, longer-term treasury prices trading lower and the dollar easing back against its main rivals.

Mr Trump’s victory in November fuelled a strong rally for US stocks and the dollar and a steep sell-off for Treasuries amid a surge of optimism that his promises of fiscal stimulus, infrastructure spending and lighter regulation would bolster economic growth and corporate earnings and prompt a faster pace of US interest rate rises.

Analysts said Mr Trump’s first speech after his election victory had struck a noticeably conciliatory and “presidential” tone.

“[Friday’s speech] was a big departure from that,” said Kathleen Brooks, research director at City Index. “He admonished the establishment who were standing right next to him, he expounded the benefits of ‘America First’, and his speech struck multiple notes on protectionism, from manufacturing, trade, jobs, defence and foreign policy.”

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“Mr Trump’s first address as president gives investors a lot of food for thought.”

Long-term outlook

Much of that thought is likely to be directed at what Mr Trump achieves in his first 100 days. Philip Marey, senior US strategist at Rabobank, sounded a note of caution about the potential impact of Mr Trump’s plans.

“Increased government spending and lower tax revenues may push up the public debt trajectory,” he said. “This could hurt the long-term outlook for the US economy. What’s more, Mr Trump’s trade policies could backfire rapidly and undermine the positive impact of his fiscal policy initiatives.”

US stocks closed higher on Friday, marking the first time in more than 50 years that a new commander in chief has been welcomed by a rising stock market on his first day in office.

The Dow Jones Industrial Average rose 94.57 points, or 0.48 percent, to 19,826.97, the S&P 500 gained 7.6 points, or 0.34 per cent, to 2,271.29 and the Nasdaq Composite added 15.25 points, or 0.28 per cent, to 5,555.33.

The mood was less sanguine across the Atlantic, where the pan-European Stoxx 600 index shed 0.1 per cent.

US Treasuries, meanwhile, trimmed early losses further out along the curves although shorter-dated paper was higher. The yield on the 10-year note, which moves inversely to its price, was up 2 basis points at 2.48 per cent, but off the day’s peak of 2.513 per cent. The two-year yield was 3 basis points lower at 1.20 per cent.

Policy uncertainty

The dollar turned slightly lower, trading 0.1 per cent down against a basket of currencies, as the euro edged up 0.1 per cent at $1.0673 and the US currency slipped marginally versus the yen to ¥114.80.

“Heightened policy uncertainty is contributing to a volatile US dollar,” said Lee Hardman, currency strategist at Bank of Tokyo-Mitsubishi UFJ.

Mr Trump this week expressed concern about the strength of the US currency – prompting it to retreat – only for Janet Yellen, chair of the Federal Reserve, to subsequently deliver hawkish comments on interest rates that put it back on upward track.

Mr Hardman highlighted comments from Steven Mnuchin, Mr Trump’s nominee for treasury secretary, which “should help to ease concerns that the Trump administration will officially adopt a weak US dollar policy, although the market will remain wary that verbal intervention could still be used to dampen US dollar strength”.

– Copyright The Financial Times Limited 2017