In a redux of the events following the shocking Brexit referendum, stock markets across the globe turned extremely volatile as the counting for the US Presidential elections progressed.
The Sensex hit the intra-day low of 25,902, almost 6 per cent lower from the previous day’s close. Asian markets have closed with deep cuts and S&P 500 futures initially lost 5 per cent to hit the low of 2,028. The dollar index lost almost 2 per cent and gold gained close to 5 per cent initially.
But that was earlier. With the announcement that Donald Trump is the new President elect of the United States of America, there has been a splendid revival in stock prices. Perhaps the end of uncertainty regarding the choice of the President is causing this relief rally.
The Sensex and the Nifty are currently just about 1 per cent down. European indices are trading between 1 to 2 per cent lower and the S&P 500 future has also recovered most of its losses.
Financial markets had mostly been rooting for Hillary Clinton with prices tumbling every time Trump was in the lead in the opinion polls. With many polls, in the past week, pointing towards a Hillary Clinton win in the Presidential race, a degree of sanguinity had seeped in to markets. The initial sell-off was a result of that.
But there are reasons why a Trump win might not be so bad for markets
Pro-business
Donald Trump is clearly pro-business and pro-Wall Street. He believes in less regulation and in letting businesses thrive. His tax proposals intend to reduce taxes across the board, thus giving a boost to consumption.
Tax policies : Hillary Clinton was proposing to increase taxes on high-income families, large businesses, on algorithmic trades, businesses that moved operations out of the country to save taxes etc.
Trump’s tax proposals are far more benign. His tax proposals can give a boost to consumption in US over the long-term, that can in turn aid growth. The revenue short-fall in the short-term could however lead to increased debt in the US.
Trump proposes to lower business tax rate from 35 per cent to 15 per cent, and eliminate the corporate alternative minimum tax. This will spell large savings to corporates and boost earnings, if implemented. He plans to provide a one-time offer to businesses to repatriate business profits from overseas in to USA by paying tax of 10 per cent. This measure can help give a boost to the dollar.
Trump plans to collapse the current seven tax brackets of individual tax to three brackets and increase the standard deduction limits of single filers. These rates are expected to slash the tax outgo of the lower income groups while maintaining the tax rate of high income groups at current level.
Less regulations : While Clinton favoured clamping down on Wall Street to ensure that a repeat of 2008 crisis does not occur, Trump is in favour of lower regulations. He does not have any specific views on imposing restrictions on banks and Wall Street firms, which is favourable to stock markets.
Challenges
That said the first few months of Trump’s Presidency are not going to be exactly smooth. On economy, he plans to increase the growth to 3.5 per cent on average to make it increase to 4 per cent over the next few years. He also targets to create 25 million new jobs over the next decade but hasn’t really spelt out how he plans to grow the economy or create these jobs.
His stance on immigrants has got many emerging economies that have large services exports to the US on the edge. His comments about China’s policy of keeping the yuan undervalued increase the prospects of currency war. Further, increased geo-political risks appear to loom with his hard-line stance against terror groups.
The stance on trade
Trump’s rhetoric against free-trade, that he thinks is responsible for erosion of American jobs is perhaps the key factor that spooks markets. He has promised to renegotiate the NAFTA (North American Free Trade Agreement) with Canada and Mexico, put the Trans Pacific Partnership (TPP) deal on hold, impose a countervailing duty on Chinese imports and use tariffs to eliminate trade deficits with all countries.
It is however unclear whether he will be able to push through these measures in the current global ecosystem. The repercussions of these measures on the US economy are also likely to be severe and could make him go slow, once he assumes office.
Donald Trump is a business man and it is hoped that he will act in a professional and rational manner once he comes to power. The first few days in office are critical to give cues about the direction of his policies.