Victory for Donald Trump in the US presidential election and the markets’ reaction to this event is a venture of the year or may be a decade. It is difficult to remember a time when there were so many mistakes in the markets when the forecast were all wrong.
We have seen plenty of changes in the financial markets recently.
In order to better understand what is happening, let’s view the factors, which affect price movement in the markets.
- monetary policy of the Central Bank
- budget and fiscal policy of the country
These are two factors, which influence financial markets and assets. American economy is the largest in the world. American stock and commodity markets are the largest in the world. The USD is the main currency, which is used for trading of the major commodities. Therefore, a new US President and his policy can cause changes in the financial markets.
We just need to forecast possible scenarios and try to use these new developments for our benefit.
Trump and twitter
Top Manager of the Singapore exchange, Chu State believes that Donald Trump’s comments in the social network Twitter are positive for the U.S. market.
Experts believe that the uncertainty related with Donald Trump is a beneficial feature for traders as the variety of trading options has increased.
Trump posts comments in Twitter almost every day, and immediately after the publication market situation changes. No one knows for sure what will happen and traders take advantage of this fact.
Look at the examples of how one comment in tweeter affects the balance of power in the financial market.
Trump’s comments in Twitter were quite harsh. The F-35 program and the cost are out of control. Billions of dollars can be and will be saved on military purchases other after the 20th of January, that what Trump said on Monday.
Trump’s comments caused the decline in the shares of the manufacturer of fighter Lockheed Martin by 4.2%, capitalization of the company fell by $2 billion. Shares of the several contractors in the defense sector have also decreased.
Boeing is building a brand new 747 Air Force One for future presidents, but costs are out of control, more than $4 billion. Cancel order!
— Donald J. Trump (@realDonaldTrump) December, 6 2016 г.
After this comment shares of the company have dropped in price.
General Motors also caught the blame.
Donald Trump has said that General Motors is sending Mexican made model of Chevy Cruze to U.S. car dealers-tax free across border. Make in U.S.A.or pay big border tax!
The reaction was not long in coming.
After a couple of weeks Wall Street Journal reported that General Motors will invest $1 billion and will create thousands of jobs in the United States.
New President of the United States has forced traders to read Twitter.
Trump and migrants
The US President has paid attention to the migration. Although he is not speaking now about the construction of a "very high wall on the border with Mexico on the Mexican money," which he haspromised during the election period, however, on January 25 Donald Trump has signed a decree on protection of the border, which stipulates the construction of the wall on the border with Mexico. The issue of timing and price remains open.
The Ministry of labour will have to make inspection in order to find all violations in issuing visas, which has had a negative impact on the American working class.
Where they plan to build a wall
On the border with Mexico. The length of the border is 3145 km. Today, the length of the barriers, which were constructed during the presidency of Bill Clinton in order to combat drug trafficking, is 1078 km. Trump plans to build barriers for another 1600 km.
The main part of the wall was built after 2006, when George W. Bush signed the Secure Fence Act, which stipulated the construction of the barrier over 1100 km. According to Secure Fence Act, the cost of construction was estimated at $6 billion. Due to the high cost of construction, this project was not completed.
In his speech before employees of the Ministry of Internal Security, President has said that the decrees, which he signed "will save thousands of lives, millions of jobs and billions of dollars."
Trump and Dodd-Frank reform
The Dodd — Frank Wall Street Reform and Consumer Protection Act (Dodd — Frank act) is a legislative act of the United States, adopted on 21 July 2010 in order to mitigate the risks of the US financial system.
The law has significantly changed the activity of the Federal authorities, governing the provision of financial services, and has also entailed the foundation of the additional financial regulatory body — the Council for the supervision of financial stability.
This law was aimed at limiting activities of the commercial banks, which came under significant restrictions.
For example, Dodd-Frank includes Volcker rule, which is related to the financial market and stipulates the following:
1. Separation of investment services of the banking sector from the consumer market.
Banks are prohibited to use deposits of their clients in the investment and speculative projects.
2. Banks are prohibited to invest into hedge funds and other investment funds more than 3% of their 1 tier capital.
A simple restriction of investing into the financial sector. An attempt to limit risks from the speculative and investment operations.
3. A ban on trading precious metals in the OTC market for the US residents.
4. A ban on trading in the foreign exchange and OTC market, including Forex for theUS residents.
As a result, this bill helped to solve the main problem of the US banking system in 2008-2011 - reduce systemic risks that could have led to the crisis, similar to the crisis of 2007-2008. On the other hand, the bill created a situation when the largest U.S. banks were unable to recover their capitalization to the before crisis level.
The decision to repeal Dodd-Frank was a campaign promise of Trump. It is likely that this proposal will be supported in Congress due to the reason that the introduction of this law in 2010 caused a lot of controversies.
Possible consequences for financial markets:
- American stock and OTC Forex market may receive additional impetus for growth.
- The margin of profitability of the US banking system will grow.
- Systemic risks for investment banking products will increase. If the law Dodd-Frank used to limit Bank investments in the investment products with a value of 3% of the capital, but there are no any restrictions.
- Banks reliance on the US Fed Reserve will increase.
Unpredictable politics of Donald Trump and his resolution to fulfill his electoral promises will maintain volatility in the financial markets. The year 2017 can become a year of long lasting fluctuation in the market.
- Twitter of the 45th President of the United States has become a powerful communication tool, having a strong impact on the financial markets. Traders can use it as a useful new tool for their trading.
- Theoretically, measures against illegal migrants can help create additional jobs and reduce crimes. In practice, the results of such reforms are unpredictable.
- Cancellation of the Dodd-Frank law and the rules of Volcker will give a strong impetus for the rise in stock and OTC markets. However, it will also increase risks of the commercial banks and will boost fraudulence.
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The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.