Donald Trump’s first 100 days in office: reality bites

Donald Trump’s move to the White House has raised expectations of a radical economic overhaul.

But now the 45th president of the United States is learning the hard way that getting things done in Washington can be an excruciating affair. This holds true even though the Republicans control US Congress.

Meanwhile, expectations that the US president would act swiftly to push through tax reform, deregulation and bold infrastructure investments have started to diminish amid political push-back and administrative delays.

Twist and turns at home and abroad
This is best illustrated by the new administration’s failure to “repeal and replace” Barack Obama’s healthcare project, the Affordable Care Act (“Obamacare”), to the dismay of many conservative voters. Other prominent examples can be found in the areas of tax and infrastructure, where very little tangible progress has been made so far. Likewise, the administration’s recent conciliatory tone on international trade stands in sharp contrast to the president’s previous protectionist rhetoric.

This pattern is repeated on the geopolitical front. In a remarkable about-face, Donald Trump has turned interventionist in conflict zones, launching an air strike in Syria and talking tough with North Korea. Moreover, he is willing to compromise on trade with China if the country’s leaders keep their North Korean protégés in check.
The fact that the US Treasury has refrained from brandishing China a currency manipulator is being used as a chip in a wider geopolitical bargain. Whether this “art of the deal” – a cherished Trump principle – can also be successful on the geopolitical stage remains to be seen.

“Trump trade” reversed on US markets
Donald Trump has so far clearly failed to live up to his own “Contract with the American Voter” that outlines his 100-day action plan for American greatness. As a consequence, the so-called Trump trade – higher government- bond yields, a stronger US dollar, US small caps outperforming their large-cap counterparts – has been partly or even fully reversed (see chart 1).

Interestingly, there is a sharp discrepancy between Trump’s sagging approval ratings and the public’s very favourable assessment of business conditions (see chart 2). The swift issuance of executive orders concerning the deregulation of areas such as energy, carfuel emissions, media, telecom and building probably contributed to positive sentiment. Crucially, the increasingly broad global recovery already in place before the election surely also helped. In all fairness, let’s not forget that the US president simply doesn’t possess the legal or institutional authority to push through sweeping economic changes on his own. Long-term structural trends such as demographics, technological progress or productivity growth remain the overriding factors to gauge the direction of the US and global economy.

Europe gets some respite from the French ballot
Moving beyond the US, the outcome of the first round of the French presidential election was consistent with our base scenario and broader market expectations: Emmanuel Macron, the centrist candidate and right-wing populist Marine Le Pen qualified for the run-off on 7 May, with the former being tipped to carry the day. Everything else being equal, a Macron victory would be supportive for eurozone related assets, from “periphery” government bonds to bank shares and the euro. It would remove a sword of Damocles over the European project, with Italian parliamentary elections – looming in May 2018 at the latest – remaining the main political risk ahead given widespread support for a protest party there.

Our portfolio positioning remains unchanged for the time being. We are generally neutral on equities, overweight on credit (corporate bonds and emerging-market debt) and strongly underweight on government bonds of “core” industrial countries such as the US and Germany.
The global environment remains supportive for risky assets owing to reasonably strong corporate earnings and the major central banks’ still accommodative monetary policy. However, valuations aren’t particularly appealing at the moment, capping the upside potential.

Christophe Bernard – Chief Strategist – Vontobel