Van Eck Vector ETFs comments that markets appear to be ignoring the risks of Trump’s policies.
Van Eck Vector ETFs comments that markets appear to be ignoring the risks of Trump’s policies. The firm writes that markets are pricing in the potential benefits of tax cuts and increased spending while ignoring the unintended negative long-term consequences of these policies.
The Fed’s efforts to tighten policy could further exacerbate existing risks in the global financial system, the firm says, citing surprising moves in the markets since Donald Trump‘s victory which have weighed on gold. Since announcing the results of the US elections on Wednesday morning, the gold price dropped approximately 4 per cent (as of market close on 14 November).
“The markets are focused entirely on the potentially positive impact that tax cuts and infrastructure spending will have on the economy,” says Joe Foster, portfolio manager and strategist for the active gold strategies at VanEck. “This rosy scenario markets are now expecting has a low likelihood of playing out. The rewards the economy might realize from Trump’s policies are outweighed by the risks.” The expert expects the markets to take a few weeks to settle down and until then, a move below USD 1,200 cannot be ruled out. “However, in the longer term, we believe the gold market will resume its positive trend as a hedge against financial risk,” Foster says.
In particular Trump’s immigration and trade policies could cause economic risk. “His aggressive immigration policy could lead to potential civil unrest, extreme costs, and logistical challenges once implemented” Foster explains. In combination with his plans for cutting taxes, the national debt could expand to unsustainable levels should deficit spending on infrastructure increase. The Fed’s efforts to tighten policy could escalate this scenario even further: “Market moves in interest rates have given the Fed ample headroom to increase rates in December and a rate increase has been priced into gold and US Dollar. In a rising rate environment, the cost of government debt service would likely become overwhelming,” Foster says.
The global economy will not be safe from the unintended consequences of Trump’s policies either. “Rising rates and a strong dollar would starve the struggling global economy of needed capital, while aggressive changes to trade policy and increased protectionism would likely create a drag on global growth.” In addition, after eight years of expansion, there are signs that the US economy has entered the “late cycle” phase. “A recession, layered onto the existing risks we see in a Trump presidency, makes a systemic financial crisis more likely,” says Foster.