Trump rally spills into Europe
European stocks sprang into action on Wednesday, taking their lead from fresh record highs on Wall Street. The DAX, the Germany equity benchmark, struck its highest since July 2015. The FTSE 100 benefitted from the ‘risk-on’ mood in global markets but gains were hampered by a rise in the pound.
Shares of Tesco (LON:TSCO) dropped on reports the supermarket will face another lawsuit from investors. Sales improved over the last two quarters but it will be a while before chief executive Dave Lewis can wash his hands of the accounting scandal.
There was a mixed response to generally positive updates from UK-listed mining companies. Antofagasta (LON:ANTO) was amongst the top risers while BHP (LON:BLT) and Rio Tinto (LON:RIO) were under pressure.
Dow crosses 20k border before wall is built
Stocks in the US opened higher on Wednesday with the Dow Jones industrial Average crossing above 20,000 for the first time. After to-ing and fro-ing near record highs since December, the US benchmark finally crossed the psychological barrier.
For all the supposed uncertainty surrounding the new President, it only took two full days in office for the Dow to breach 20,000. It comes a day after the S&P 500 hit a new record high.
Dow 20k came on the same day President Trump was preparing to sign an executive order to build a wall on the US-Mexican border. The big industrial giants including Caterpillar (NYSE:CAT) and General Electric (NYSE:GE) led the gains on the expectation of an increase in infrastructure spending under Trump. A lot of diggers will be needed to build the wall! In reality, Trump can start the building, but will need help from Congress to get it finished.
Building a wall on the US-Mexico border was Donald Trump’s most famous and probably most controversial campaign promise. He will also sign an executive order designed to limit immigration. Actually following through with his “Great Wall” is a sign of intent. It is our view that the gains in the stock market are not just a function of companies winning infrastructure business. Investors are gaining certainty from Trump turning his promises to reality.
There are a number of psychological factors at work when the stock market crosses these big barriers that we will be watching. Widespread reporting of Dow 20k will create a FOMO (fear of missing out) effect on the under-invested, generating more buying interest. On the other hand, the 20,000 level will attract profit-taking from some long-time stock market bulls, causing a counteracting selling force.
We remain confident in the durability of the US stock market rally. If Donald Trump will build a wall, there’s every reason to believe he will cut taxes, increase spending and cut regulation- all good things for US companies.
Dollar takes a pounding, GBP/USD > 1.26
While Donald Trump’s wall-building will take all the headlines, another factor is that talking down the dollar has become a bit commonplace in his administration. Yesterday we cited the importance of incoming Treasury Secretary Steve Mnuchin talking about an “excessively strong dollar”. A rising US dollar is a headwind to the foreign earnings of US multinationals. The dollar slipped again on Wednesday, though the dollar index held onto 100.
A strong dollar doesn’t fully explain GBP/USD above 1.26; there were also gains in GBP/EUR and GBP/JPY. In essence, the pound is strong in of itself. We maintain our positive view on the pound but will be more neutral in the short term should these gains extend much further.