Simon Ward, Chief Economist, reacts to Trump’s victory and the likely economic and financial impact of a Republican President and Congress.
Markets were discounting the continuity implied by a Clinton victory and have weakened to reflect uncertainty about the policies of the volatile Mr Trump. The election of a Republican President and Congress, however, is not normally viewed as negative for the economic and financial outlook. The market reaction to the surprise Trump victory may mirror the aftermath of the UK's Brexit vote, with an initial sharp fall in equities reversed as investors conclude that that the economic implications are mixed and do not significantly affect the outlook for the next six to 12 months.
On the positive side, the Republican clean sweep should allow Mr Trump to implement plans for a major tax reform and fiscal stimulus. This should boost growth but at the probable cost of higher inflation and bond yields.
The main risk is that Mr Trump follows through on threats to impose import tariffs on important trading partners. Having secured victory, however, he may soften his rhetoric and pursue a negotiated approach, which – as with Brexit – will take time to plan and implement. Concern has also been expressed that Mr Trump will look for a replacement for Fed Chair, Janet Yellen; he is more likely to allow her to serve out the remainder of her term (which ends in February 2018) but, in any case, would be unlikely to appoint a replacement with any less dovish views. Beyond the near term, therefore, the implications of today's shock result may be neutral for equities, negative for bonds and positive for the US dollar, the latter partly reflecting likely tax incentives for US corporations to repatriate foreign-held cash.