Donald Trump’s volatile first two weeks in office

Feb 3, 2017 | General, Macroeconomics-Politics, US Banks

We did not post any US updates for quite some time as we waited for Donald Trump’s inauguration and the first indications of his decision making process and his new economic policies. And so far we have received a very mixed picture:

  • His immigration ban caused a lot of unrest, both in the US and internationally. Many Silicon Valley technology companies complained against the ban as they heavily rely on skilled foreign workers and immigrants to fill in specialised IT and software development positions.
  • His anti-free trade rhetoric, including his decision to renegotiate NAFTA, are not good news for the US economy and US companies with substantial international activities. His attacks on Mexico, China and Germany, three countries with which the US has big trade deficits and his threats to impose tariffs on goods from these countries, were also seen by analysts as negative developments as this could lead to trade retaliation and a tariffs war.
  • The Republican Party seems intent to go ahead and approve in Congress Trump’s election promises of corporate tax cuts and increased infrastructure spending. This is good news for the US economy and for corporate profitability. However, there are concerns about the extent of the tax cuts and the size of the fiscal stimulus due to the need to balance the US budget and avoid adding to the already substantial US national debt of $20 trillion via fiscal deficits. The consensus is that the corporate tax rate will be cut to 20% or 25% vs Trump’s election promises of 15%. The current federal tax rate in the US is 35% but most companies pay an average tax rate of 25%-28%. It is also unlikely that Trump will be able to pass through Congress his entire fiscal stimulus plan but it is expected that some sort of fiscal stimulus and additional infrastructure spending will definitely be approved by both Republicans and Democrats. Already, the Republican party has announced that due to the annual US budget cycle, corporate tax cuts and fiscal stimulus will not be brought on the table for Congress approval before spring. Overall, both these initiatives will be good for the profitability of US corporates and US banks but it may take at least 6-12 months to see any meaningful impact on their earnings. Additionally, higher fiscal spending may lead to higher US inflation which may force the Federal Reserve to increase US interest rates at a faster pace, which is also good news for the profitability of US banks. The Federal Reserve currently anticipates three 0.25% interest rate hikes in 2017.
  • Trump is expected to sign an executive order on Friday February 3rd regarding the partial deregulation of the US banking sector via a review and partial dismantling of the Dodd-Frank Act which was introduced after the 2008 financial crisis to make US banks safer. US banks shares have rallied on the news and this development is expected to be good for US banks shares in the medium-term as some of these regulations were seen as excessive and stiffling banks profits, especially as the US economy has fully recovered since 2008 and US banks have built substantial capital buffers.

Overall, having largely sat out the Trump driven post-election rally and the recent pullback following Trump’s immigration ban and anti-trade rhetoric, we now believe that Trump and the Republicans seem determined to go ahead with policies that will boost corporate earnings and particularly US banks earnings, hence we have revised our outlook for the US banking sector from neutral just before Trump took office to positive right now. And the broad consensus amongst US equity analysts is that the Trump administration is very positive for banking stocks in particular but not positive for technology and pharmaceutical stocks.