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Where next and why ???

GBP is the main beneficiary from last week’s upheaval in currency and bond markets, but has given up 100point against the USD today. Following holidays in the US and parts of Europe on Friday, perhaps we are seeing a natural selling into the strength, but GBP is higher than last week, despite being 16% weaker since June24th.

 

EUR/USD has fallen substantially, as the market buys the greenback, and long-term US yields climb on the belief that Trump will make good on spending and borrowing plans that could re-inflate prices.

 

Goldman analysts have set out 3 scenarios in a very interesting piece of Trump analysis. (1) covers s full implementation of his policies – trade restrictions & higher fiscal expenditure (2) covers a benign scenario with only the fiscal side being implemented (3) covers an ‘adverse’ scenario of trade and migration restrictions, alongside rising rates to combat inflation.
All 3 scenarios have higher GDP through to 2019, and higher inflation. Scenario (3) predicts stagflation – higher prices & unemployment, alongside lower growth rates.  The bond market was way ahead of other markets after the election, and looking at European bonds (France and Italy in particular), the shared currency will be back in focus and European money managers will certainly be in for some portfolio re-balancing.

 

Get used to the terms ‘reflation’ and anti-‘globalism’ (which in itself is Trump’s own version of ‘globalization’) – they will haunt the headlines like Brexit did earlier this year.

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