100 days of Trump: ‘Unsettling’ to European markets?

From a European market perspective, the first 100 days of the Trump administration seem to be a small positive.

In the meantime, President Trump’s mixed messages on the U.S. stance in matters of geopolitics, trade and climate change are worrying European leaders. While they continue to assess, we focus on market fundamentals.

The first 100 days

My colleague Erik Ristuben described the presidency of the United States as a tough job last week. By design, it is not a position that comes with strong executive powers, unlike, say, President Trump’s previous role as CEO of his own corporation.

Those limitations on the president’s power have been on clear display in the first 100 days of Trump’s presidency. From a European perspective, there have not been significant legislative changes. And many of the campaign promises that European markets may be sensitive about have been put on the back burner.

European markets seem to believe this limited power is a good thing, as we believe markets long for predictability. After all, no European leader wants to see the U.S. get into a conflict with China over its currency management. Nor do they want the U.S. to exit the North Atlantic Treaty Organization (NATO), the Paris Agreement or even the North American Free Trade Agreement (NAFTA).

The uncertainty that may come from those potential actions does create a level of market unpredictability that can’t be ignored. We believe markets always prefer something as close to the status quo as possible when it comes to potential geopolitical risk.

That being said, European leaders understand there is a new sheriff in town and changes in U.S. policy are inevitable. And the difficulty they are facing in assessing what those policy changes will be is what is likely unsettling.

Can European leaders help maintain that status quo? Can they help create more economic predictability? Do they need to rally in support of free trade? Or is the U.S. Republican party already steering policy away from trade confrontations on trade with for instance China? And will European leaders need to work to contain the fallout from a U.S. exit from the Paris Agreement? Or will Trump’s administration work within its framework after all?

Implications for European markets

Unsettled though European leaders may be, from a European market perspective the first 100 days of Trump’s presidency have been a small positive. The hope that economic growth would be boosted and corporate profitability supported through a combination of tax cuts and infrastructure investments pushed U.S. equity markets to new highs and supported equity prices globally. For example, the MSCI USA Index is up 12.6% since the election and the MSCI EMU (European Economic and Monetary Union) Index is up 18.6%.2

So, have President Trump’s policies to-date boosted European equities? These markets were already well supported through a combination of robust economic growth, monetary stimulus, relatively attractive valuations and rising corporate profitability prior to his election. In fact, as of the end of April, the MSCI EMU Index has outperformed the global equity market, as measured by the MSCI World Index, by 6.7% since the election.2

I think that these developments seem to be more important to European markets right now than these last 100 days of U.S. politics. After all, European equities have maintained their upward trajectory at the same time that some expectations around the U.S. president’s potential policies have faded, as noted earlier this month by Erik Ristuben in our weekly market recap video.

Therefore, as we’ve stated before in the Global Market Outlook - Q2 Update, we continue to favor European equities over U.S. equities, noting that the latter have expensive valuations as well as challenging fundamentals to overcome.

1 Thompson Reuters Datastream. MSCI USA Index and MSCI EMU Index performance through April 30, 2017, as of May 2, 2017.

2 Thompson Reuters Datastream. MSCI EMU Index vs. MSCI World Index performance through April 30, 2017, as of May 2, 2017.