The election of Donald Trump as president of the United States was well received by the financial markets. Its proposals for deregulation in some strategic sectors and fiscal stimulus generated a rally of shares in the US stock markets, due to the favorable effects they have on economic activity in that country. Investor enthusiasm drove its top indices to record highs this year.
However, President Truco’s obsession with the implementation of his mercantilist and anti-immigration ideas caused the mood of investors to drop from the euphoria after his inauguration, an incipient preoccupation in recent days about the effect of his policies In global economic activity and international financial stability.
Concern grows as the executive orders it imparts make it clear that the extreme approaches to immigration restrictions and protectionism were not electoral rhetoric.
The temporary prohibition of entry to the citizens of seven countries of the Muslim majority caused a confrontation between the executive and jurisdictional powers, which is undesirable in a democracy. The measure was demand by powerful companies in the information technology and telecommunications sector. The ruling of first instance forced to suspend it, which motivated to declarations left of tone of the president. The Department of Justice appealed to a Federal Court of Appeal that upheld the sentence. Consequently, it is likely now before the Supreme Court, that final verdict. However, in this instance a tie could occur that would maintain the order of the Court of Appeal.
The controversy over the immigration prohibition, because of its discriminatory implications and the non-fulfillment of the freedom of worship enshrined in the Constitution of the United States, deepened political polarization. In such circumstances, cooperation between Republicans and Democrats is difficult, crucial to government initiatives in Congress.
You might be interested in: Scientists who risk losing their jobs because of Trump
For this reason, it does not seem easy to reach agreement on tax cuts or the financing of increased infrastructure spending. Under these conditions, the probability of its implementation occurring in 2018 or beyond is much higher than it is in 2017. This eventuality disillusioned investors.
Its disenchantment was also encouraged by the lack of precision of the Government on the moment and the way in which it began to implement the fiscal stimulus and the deregulation. Perhaps because of this, last week the president announced that in one or two more, make known the details of a “phenomenal” tax cut for companies.
In parallel, to the extent that the impact of the fiscal stimulus on the deficit and debt would be expected to be harmful to the state’s solvency, long-term interest rates increased. If prolonged, this effect may discourage private investment in that country, with adverse impacts on productivity, growth and employment generation.
As the economy is close to full employment, the sensation in the markets arose that much of the effect of the fiscal stimulus on demand will generate greater inflationary pressures, instead of an expansion of economic activity. The implementation of protective measures would also push prices upward, as imported goods and services are lacking. Therefore, the operators agree with the Federal Reserve, it was obligatorily verified the schedule of increase of its goal for the interest rate on the federal funds, reason why it increased the interest rates of short term.
Prospects for higher interest rates in the United States strengthened its currency. Consequently, as argued Nouriel Roubini, the appreciation of the dollar could dismantle in the medium term the competitiveness of goods and services produced in that country, with unfavorable repercussions on its economic activity and unemployment, without also contributing to narrow the trade deficit .
Read also: Will global geopolitical instability prevail with Trump?
The extreme protectionism proposed during the campaign can cause wars that diminish the volume of world trade, which restores dynamism to global economic activity. For this reason, neither President Truco’s accusations of a supposed manipulation of exchange rates by the Chinese People’s Bank and the European Central Bank, which would have the purpose of favoring the competitiveness of their exports, fell well in the markets. the United States. Such imputations are worrisome because they may be.