Sharp losses in financial markets on Monday following President Trump's inauguration reveal just how tense traders are as they await impending economic and trade policies.
Few portfolio managers were willing to discuss their positioning, given how little information is in the market. However, many agree there will be a sharp market correction at some point, given how hard equities have rallied since the November 8 election.
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Trump's first 100 days: the analysts' view
As the US moves from a 'post-truth' election to post-Trump inauguration, markets ponder an uncertain future for the world economy.
Bank of America Merrill Lynch's investment strategist Michael Hartnett has called the end of the so-called "Icarus Trade"; where global stock markets will rise another 10 per cent this quarter, but will be followed by an inverse "meltdown" later in 2017 as the US Federal Reserve tightens monetary policy and a lift in bond yields will skewer the Trump reflation trade.
Others suggest the adjustment is coming sooner.
"I am expecting the correction to come earlier this year with significant expectation already priced in to the stock market," says Angus Geddes, chief executive of Fat Prophets. "This is based on consensus forecasts of higher spending, tax cuts and higher inflation rates."
Stock valuations have been fanned by record low interest rates and unprecedented risk-free rates in bonds for some time now, putting investors in an uncomfortable position.
"If valuations are driven by anything other than earnings, the potential for you to be hurt is that much greater," said Frank Villante, chief investment officer at Celeste Investment Management.
Trade deals
"But if the reason for central bankers to cut rates to zero or negative evaporates, then there is scope or latitude for the market to adjust and for there to be a correction."
The euphoric "Trump trade", which saw equity markets rally to record highs, has given way to unease after President Trump said he plans to begin renegotiating the North American Free Trade Agreement with the leaders of Canada and Mexico.
The trade agreement was signed in January 1994 by Mexico president Carlos Salinas, United States president George W. Bush and Canadian prime minister Brian Mulroney.
Further to renegotiating NAFTA, the new administration has confirmed it will pull out of the Trans Pacific Partnership. On Monday Trade Minister Steve Ciobo conceded the deal would have to be renegotiated without the support of the world's largest economy.
"If trade policy does change, that really will have an impact on financial markets," said Mr Villante. "But at the moment it's too difficult to know."
The potential for a 45 per cent tariff on Chinese goods into America has loomed heavily over markets in recent weeks.
"Something like that means these imported products become 20, 30, 40 per cent more expensive and that inevitably causes inflationary pressures, which inevitably puts pressure on interest rates to do things, and economies around the world will have issues," said Mr Villante. "But it's too hard to know now; the policy base is still embryonic at best."