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  • Sharp Asset Management

Victory for Donald Trump - Are we surprised?

The disenfranchised have spoken again! The results….

  • Despite polls favouring Hilary Clinton by a narrow margin, Donald Trump will be the 45th President of the United States winning the electoral college vote (see figure below).

  • The Republican Party will have a majority in both the House and Senate as well as the presidency, the first time in 10 years.

  • If the Republicans can reach agreement among themselves, there will be a wonderful opportunity to address key issues in the U.S. such as long term funding for retirees and health care.

  • Trump’s platform leans towards big tax cuts and increased spending on infrastructure (with no indication of how to finance this), renegotiating trade deals, rescinding Obamacare, reducing immigration and finally, providing regulatory relief in the banking and energy industries.

Market reaction

  • There was significant volatility overnight in the futures, commodities and overseas stock markets.

  • As of 1:00 p.m., North American stocks were in positive territory and had been for most of the trading day.

  • U.S. government bond yields jumped higher on expectations for increased budget deficits during a Trump presidency.

Things for investors to be concerned about:

  • Trade Wars - Trump has threatened to implement a 45% tariff on Chinese exports and a 35% tariff on some Mexican imports; retaliatory action from both China and Mexico could impact a fifth of US exports.

  • Trump has insinuated that he would replace Janet Yellen as chairperson of the Federal Reserve when her term expires in February 2018; this creates uncertainty about monetary policy in addition to the vagueness about Trump’s economic policies

What does this mean for Canada?

  • Although Canada was not the focus of Trump’s anti-trade rhetoric during his campaign, Canada is a NAFTA member and if the President-Elect pursues renegotiation it will cause a great deal of uncertainty for the $51 billion in goods that cross the border each month.

  • One positive for Canada is that a Trump win has increased the likelihood Keystone XL pipeline will be approved, enabling Canada to export more crude oil into the U.S. market.

  • Trump’s spending policies will boost U.S. economic growth and this will have a positive spillover effect on our country.

  • The Bank of Canada is likely to hold rates steady given the increased uncertainty over the surprise US election result.

Bottom line

In order to dial down uncertainty, President-elect Trump must clarify early priorities and his transition team. If the focus is in fact on tax cuts and pro-growth policies, this should lead to a positive response from stock markets and higher yields on bonds.

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