What a difference a week makes. At the beginning of the week sharemarkets across the globe moved higher as the polls pointed to Democrat candidate Hillary Clinton winning the US presidential election.
By Wednesday afternoon, it was clear the markets had it wrong. The S&P;/ASX 200 fell as much as 4 per cent during trade, moving lower as US futures hit their limit in anticipation of one of the worst days on the bourse in recent years.
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Trump on economics
Donald Trump plans to radically shift the direction of America's economic policy.
But Donald Trump continued to deliver surprises that had characterised his campaign, this time in a toned done, conciliatory speech where he spoke of bringing a divided nation together and even thanking opponent Clinton for her service.
The next day, the ASX more than recouped the previous day's gains, rallying 3.2 per cent, its best day in five years. The Dow Jones pushed to a fresh record high.
![Markets have embraced Donald Trump's fiscal stimulus plans, but will the markets really benefit?](/web/20161115052405im_/http://www.smh.com.au/content/dam/images/g/s/n/k/k/l/image.related.articleLeadwide.620x349.gsmgky.png/1478868902570.jpg)
Investors took a clean sweep of the Congress by the Republican party as the end of years of political deadlock, effectively clearing the way for Trump to push through some of his growth boosting policies, from infrastructure funding to slashing corporate tax cuts.
"It is far too early to say that markets are in the clear and that it is only blue skies above," Perpetual multi-asset head of investment strategy Matthew Sherwood says.
"There are major changes and stress points ahead in politics, regional trade and global security, not to mention a highly tenuous relationship between the new administration and the US Federal Reserve."
The market appears to have applied a positive lens to a President Donald Trump, but for each of his policies, there are equal reasons for optimism and scepticism.
Commodities
![An American flag is displayed on Union Pacific Corp. train as it is loaded with coal at the Savage Industries Co. processing facility in Price, Utah, on Friday, May 27, 2016. Power-plant demand for gas has been breaking seasonal records amid low prices and a record shutdown of coal plants last year to meet stricter environmental regulations, government data show. Photographer: George Frey/Bloomberg](http://web.archive.org./web/20161115052405im_/http://www.smh.com.au/content/dam/images/g/s/n/p/0/6/image.imgtype.articleLeadwide.620x349.png/1478853596951.png)
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Trump's victory has lit a fire under the price of iron ore sending it its highest level since late 2014 on Friday, fetching $US74.12¢ a tonne.
Bulk commodities including coal and iron ore have enjoyed a strong bounce since commodity prices hit their nadir in January on fears of a Chinese economy hard landing that has not transpired, with policymakers in the world's biggest economy injecting stimulus into the manufacturing sector, sending steel prices soaring.
Donald Trump's infrastructure agenda can be interpreted as a positive for Australia due to the increase in demand for commodities, JP Morgan economist Sally Auld says.Â
Commodity traders have certainly chosen to see it this way, sending commodity prices, and the share prices of Australia's biggest producers surging.
On Thursday BHP Billiton shares rallied 8.2 per cent, while pure play miner Fortescue Metals soared 10.7 per cent.
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"We would caution against too much optimism on this front just yet, given the uncertainty around these policies and the fact that dynamics in the Chinese housing market and infrastructure spending will likely be a more important driver for iron ore demand than US infrastructure spend," Auld says.
"Indeed, US steel production is less than 25 per cent of Chinese steel production."
Not only that is the looming threat of increased trade tariffs.
"With Trump threatening to renegotiate trade agreements, the free flow of commodities comes into question," ANZ senior commodity analyst Daniel Hynes​ says.
"In the energy space, Donald Trump wants to speed up America's energy independency by encouraging the development of domestic resources. This would ultimately be negative for oil and coal prices if successful."
For industrial metals, the optimism in the infrastructure spending could be mitigated by Trump's vision to use American steel, Hynes notes.
"With so much ambiguity around his policies, volatility is likely to remain high in commodity markets."
One market that has yet to benefit from the optimism in the space is the Australian dollar, which has effectively become caught between two Trump-inspired forces.
The commodities cheer has seen the Aussie spike as high as US77.4¢, but stronger US dollar on inflationary expectations has kept a lid on its strength. As a result, the currency fluctuated in the order of 2.2 per cent as traders weighed the longer term implications for the Aussie.
Interest rates
![The Marriner S. Eccles Federal Reserve Board Building is seen in Washington, DC June 10, 2004. The Federal Reserve will at least double its 1 percent interest- rate target for overnight loans between banks by year-end, a majority of economists at Wall Street's largest bond-trading firms said. Photographer: Mike Mergen/Bloomberg News.](http://web.archive.org./web/20161115052405im_/http://www.smh.com.au/content/dam/images/g/s/n/o/z/4/image.imgtype.articleLeadwide.620x349.png/1478853443631.png)
Donald Trump has made no secret of the fact he thinks interest rates are too low, and have been kept artificially so by the US Federal Reserve in a bid to prop up Wall Street.
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Trump's fiscal policies are expected to push inflation higher, and as a result, the Fed may be forced to revisit its slow-and-steady approach to raising interest rates. The central bank has only raised rates once, in December last year, lifting rates from virtually zero where they had remained since the global financial crisis.
"The market and the US Federal Reserve will probably have to re-examine their policy expectations," Perpetual's Sherwood says.
While the market has now priced in an 80 per cent chance of a rate hike when the Fed meets in December, a view backed up by voting member James Bullard this week, it is also unlikely the central bank will be trigger-happy either.
"We would expect the Fed to now sit out for some months but look to increase rates should significant fiscal stimulus be legislated," Cameron Harrison's managing partner Paul Ashworth says.
"This has clear implication for the yield curve and the bond market rally over the last six years. It is another factor to adversely impact bond prices and bring an end to this long bond bull-market," he says.
Bonds have been one of the victims of the rally of the latter part of the week, with 10-year US bond yields having climbed as much as 2.7 per cent.
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"For equities it provides an additional paradigm for which to understand and manage – this leads to uncertainty and in turn volatility," Ashworth says.
Then there's the pressure on Janet Yellen. Ms Yellen's future remains uncertain, adding risk to the interest rate outlook.
"Is there a risk Yellen resigns before her term ends in 2018? This could pressure the Fed to adopt a different stance on policy," T Rowe Price's head of Australian equities Randal Jenneke says.
Trump's protectionist agenda could also derail the path of interest rates.
"Should President Trump prove to be serious about pursuing a more protectionist policy agenda, the negative consequences for economic activity and corporate margins could easily offset the benefits of fiscal easing. This would prevent the Fed from increasing interest rates for some time," notes Standard Life Investments.
Should these policies prove disruptive to the economy, the Fed may even consider easing.
"The subsequent effect on inflation expectations and unit labour costs would determine when and how much the Fed tightened once the turmoil subsided."
Trade
![The Evergreen Marine Corp. Ever Ulysses cargo ship is guided into the Port of Oakland by an AmNav tug boat in Oakland, California, U.S., on Thursday, Sept. 29, 2016. Container traffic at the Port of Oakland rose 1.7% in August. Photographer: Tim Rue/Bloomberg](http://web.archive.org./web/20161115052405im_/http://www.smh.com.au/content/dam/images/g/s/n/o/x/z/image.imgtype.articleLeadwide.620x349.png/1478853270532.png)
Among his policies, Donald Trump's protectionist trade stance, which appealed to a mass of middle-class voters, has investors fretting the most.
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In his campaign Trump spoke of renegotiating US free-trade agreements, including NAFTA, while slapping tariffs on major partners including a 45 per cent tariff on China and a 35 per cent tariff on Mexico.
"Trump's great political challenge will be to appease the desires of his 'silent majority' base of support, without derailing the economy," BetaShares chief economist David Bassanese says.
"On that score, a counter-productive all out trade war therefore seems unlikely, though a tougher stance with regard to trade and immigration issues should be expected."
"This should be of some relief to investors fearing a negative impact on international trade."
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A trade shock stemming from the US would be negative for global growth, which is still flagging.
"The distribution of risks to Chinese growth have shifted to the downside, given the increased probability of rising tensions in US-China trade relations and weaker Chinese export growth," Auld says.
"For Australia, neither of these outcomes are positive given Australia's status as an export-dependent economy leveraged to global trade flows."
It is unlikely Trump will target the Australia-US Free Trade Agreement, Ashworth says.
"In 2014/15, Australia's goods and service exports to the US were $20.5 billion whereas our import of goods and services from the US were $57.8 billion – a strong net surplus in favour of the US," he says.
"We don't take matters for granted, but view the Free Trade Agreement between both countries remaining intact."
Infrastructure
![istock image, construction, cranes, sunset, skyline](http://web.archive.org./web/20161115052405im_/http://www.smh.com.au/content/dam/images/g/s/n/o/v/u/image.imgtype.articleLeadwide.620x349.png/1478852953468.png)
Behind the commodity and mining stock boom this week is the promise of an infrastructure spending boom from the President-elect who make his fortune building hotels and casinos.
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"It appears that a very large fiscal stimulus program in the form of higher infrastructure spending and lower taxes is likely to be delivered in the next 12 months, which will be very constructive for consumer confidence and economic growth," Perpetual's Sherwood says.
Ben Cleary, portfolio manager at Tribeca Capital says he's as bullish as he's ever been on the resources sector as a result.
"For resource companies this result [Trump's presidency] is a bit of a game changer."
Local infrastructure companies including Transurban and construction companies including Boral and James Hardie also stand to enjoy a boost.
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However, as much as Trump's policies are bullish for business, there is also the country's national debt to contend with. US debt-to-GDP stands at 106 per cent, a peace-time high.
"Ratings agency Fitch stated that Trump policies will be negative for US sovereign credit worthiness even though there will no near-term implication for the US's AAA credit rating from the agency," Sherwood says.
"But there has to be doubts about the degree to willingness and capability of the new President carrying out his program."
Sherwood says rather than base an investment case on what Trump has said, it will be more important to watch what he actually does, noting his gracious acceptance speech struck a vastly different tone to his divisive campaign.
Tax
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Wall Street was particularly cheered by the prospect of imminently lower corporate taxes. Donald Trump has promised to slash the corporate tax rate from as high as 39 per cent to just 15 per cent, while bringing in cuts for individuals in the highest tax rate from 35 per cent to 33 per cent.
"President Trump's major policies are lower taxes for the rich, limiting access to health care for lower income families, reducing population growth through immigration control and reducing corporate tax rates," Cameron Harrison's Ashworth says.
For listed companies, the tax cuts, along with his other stimulatory policies, are likely to deliver a "big boost" to US GDP, Bell Potter's Richard Coppleson​ says, boding well for the sharemarket.
"With [fund managers'] overweight cash, the unleashing of some of that cash has now begun and a big six-week rally into the first week of January 2017," Coppleson says, reaffirming his call that the ASX 200 will close the year at 5600 points.
Australian companies with exposure to the US will be the biggest beneficiaries, including Aristocrat, Amcor, Brambles, Incitec Pivot, Macquarie Bank and Lend Lease, he says.
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But middle America may miss out on the party.
"Most of the benefit of these policies will go to higher income workers who own assets, and it's hard to see even a small portion of the benefit of these changes going to the struggling US workers who won the election for Mr Trump," Ashworth says.
It will be critical for Trump holding onto his political capital, and whether he can lift growth and living standards.
He will also have to contend with the Republican Congress which has in the past tried to rein in the country's budget deficit.
The President-elect's tax changes could also flow on into Australia, including lowering the amount of tax paid by US nationals here. The tax changes are designed to entice an estimated $US2.5 trillion tax paid offshore would be enticed back to the US, with Australia losing its share.
A lower US company tax rate was likely to increase pressure on the Turnbull government to reduce our corporate tax rate, KPMG tax partner Grant Wardell-Johnson says.
Banks
![US dollar bill US dollar. Generic.](http://web.archive.org./web/20161115052405im_/http://www.smh.com.au/content/dam/images/g/s/n/o/t/9/image.imgtype.articleLeadwide.620x349.png/1478852316472.png)
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The banking sector cheered at the news that one of President-elect Donald Trump's first orders of business would be to "dismantle" the 2010 Dodd-Frank law, enacted by the Obama Administration to deal with the fall out from the global financial crisis.
The law was designed to regulate financial institutions, and increase transparency in derivative markets, which are now traded on exchanges, but a statement from Mr Trump, via his official transition website, said the rule had helped the "big banks get bigger while community financial institutions have disappeared at a rate of one per day, and taxpayers remain on the hook for bailing out financial firms deemed too big to fail."Â
Bank stocks in the US rallied, including giants Wells Fargo, which soared 7.4 per cent, followed by Bank of America, which added 4.4 per cent. The optimism spilled into the local market, with the banks enjoying strong support on Friday.
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This overhaul has come under intense fire from Democrat and Wall Street watchdog Elizabeth Warren who has vowed to fight any and all changes to an act designed to keep the financial sector accountable.
"Americans want to hold the big banks accountable," Warren said in a prepared speech in Washington reported by Bloomberg.
"If Trump and the Republican Party try to turn loose the big banks and financial institutions so they can once again gamble with our economy and bring it all crashing down, then we will fight them every step of the way."
It is also unlikely that Trump will shred the whole deal. Wholesale rollbacks in two of Obama's reforms are unlikely, PIMCO head of public policy Libby Cantrill notes.
"A more limited expansion in the regulatory burden could help boost business confidence and investment spending," she says.
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