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Warning to Investors: Market Risks 'Taper Tantrum' Relapse Under Trump

Warning to Investors: Market Risks 'Taper Tantrum' Relapse Under Trump
Refat Mamutov | Dreamstime.com

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Monday, 10 April 2017 11:35 AM Current | Bio | Archive

There is some optimism after the summit between President Xi Jinping of China and U.S. President Donald Trump.

Trump shook Xi’s hand, which is always a good place to start when it comes to international diplomacy.

The promise of a Trump visit to China can also be considered as positive.

There is a 100-day plan to come up with some kind of trade deal.

However, there was the somewhat cautionary note on Saturday on the Trump twitter feed @realDonaldTrump that reads, ...goodwill and friendship was formed, but only time will tell on trade.

Financial markets that are eager to look for the best in this best of all possible worlds, have taken the events in Florida in the sense that the threats of a trade war between the United States and China are now put to one side.

It is certainly true that candidate Trump’s pledges on trade have not been put into practice by the president himself.

The risk for markets is that if Congress blocks other parts of the Trump agenda, and if that's the case then he will have to double down on trade as the one area of policy where the president has a significant degree of control.

U.S. national security issues may also attract some market attention with US war ships heading in the general direction of Korea, which undoubtedly points to a rise of geopolitical tensions, and the U.S. deputy national security adviser teve Bannon being removed.

However, Asian markets have seemingly overlooked these developments.

On the subject of the Federal Reserve's monetary policy, we have a couple of features today of which Fed Chair Janet Yellen is the highlight although there is broadly little uncertainty now about the likely path for U.S. interest rates this year.

The weather-subdued labor market report release on Friday is not likely to change anything notwithstanding that the headline reading was surprisingly negative showing the U.S. economy “only” added 98,000 jobs in March or about half of the 180,000 gain that was generally expected.

Encouraging was the fact that the unemployment rate fell to 4.5 percent, which was the lowest level since 2007 while the underemployment rate also fell 30 basis points, which was also its lowest level since 2007.

Wage growth came in at +0.2 percent on a monthly basis. The +4.77 percent rise as measured in January this year compared to the same month of January in 2016 should be interest to investors who keep an eye on inflation

Given that the Federal Open Market Committee (FOMC) minutes showed that most on the committee felt that we were at full employment and notwithstanding that the FOMC was somewhat split on inflation gains, Friday’s report will feed directly into those views.

So, there is practically no risk saying that the Fed is not going to react to this single set of data, also not because the big picture view remains of an US economy at full employment and also, but not least, the Federal Reserve cannot, in any way, be described as being ‘ahead of the curve’ when it comes to inflation.

Overall market expectations on Fed rate hikes remained unchanged with the odds for a June rate hike at 53 percent and a second-rate hike in December at 50 percent.

Attention should from hereon better be shifting from the monetary policy to the quantitative policy angle and in the wake of the Fed minutes pressing quantitative policy, this will be an issue of debate over the near future.

It probably will be this area that requires market and therefore investor attention.

I don’t think it’s an overstatement to say that the Federal Reserve’s intention of beginning to begin winding down over the near- to median term its almost $4.3 trillion portfolio of mortgage (MBS) and Treasury securities, will disturb the calm we actually are still seeing in the bond markets.

One of the legitimate worries for long-term investors is the question if we are on our way to experiment another “taper tantrum” phenomenon as we have had in 2013.

I think that every long-term investor in the U.S. (as in any location in the world) has a lot to win by preparing his/her portfolio for such an event that is heading our way.

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments.

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HansParisis
I think that every long-term investor in the U.S. (as in any location in the world) has a lot to win by preparing his/her portfolio for such an event that is heading our way.
investors, market, taper, tantrum, trump
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2017-35-10
Monday, 10 April 2017 11:35 AM
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