Gains have also been attributed to softer than expected materialization of Trump’s protectionist agenda, when campaign promises such as withdrawing from the North American Free Trade Agreement (NAFTA) and labelling China a currency manipulator were initially deemed imperative for the new administration. While these and several other disruptive policies have yet to materialize during the President’s first six months, the substantial unknowns surrounding the Trump administration remain. A preference for choosing unilateral agreements over multinational ones questions the White House’s commitment to global cooperation, while Trump’s vacuous Twitter messages send out confusing signals.
Thus far, there are two critical actions that have taken place during President Trump’s first six months that garner attention: the decisions to walk out of both the Transpacific Partnership (TPP) and the Paris climate agreement. Each action supports Trump’s America First rhetoric, as TPP sets his tone on trade while the Paris Accord underlined his preferences on investments. But more importantly the shared similarities reflect the administration’s full discretion to act as neither decision required any congressional review. The Republican controlled Congress was unlikely to ratify TPP while the Paris Accord was a global, non-binding agreement.
In our view, the market should see both of these choices by Trump as a harbinger for what the administration hopes for and can achieve going forward. Without bipartisan support, Trump’s main approach is one that does not require any checks and balance review, but given that separation of powers is embedded into the US constitution, he will likely continue to face policy headwinds. The caveat to this assessment falls under a national security banner, where a maritime confrontation in the South China Sea or agitation from North Korea provide the necessary pretext to act unilaterally.
Trump could also utilize Section 232 of the Trade Expansion Act of 1962 allowing him to implement tariffs without Congress should the Department of Commerce find any evidence of a national security threat. Countries with current account surpluses, notably Germany and China, have been on the receiving end of "off the wall" tweets and have become annoyed with fallacious trade accusations. Ultimately, tariffs could backfire against the US, tightening financial conditions as markets react poorly to any future visceral comments from the President.
However, keeping Trump off the protectionist path could simply be a matter of time as the calendar moves inexorably forwards. The recent unsuccessful attempt to repeal Obamacare not only damages Republican Party credibility but also sours future plans for domestic policies. Already at summer recess, Congressional members must now prepare for the upcoming mid-term election season in 2018, with many looking to rebuild political capital following a controversial six months under President Trump. The mid-term campaign season may capture the interest of Trump, who has participated in five major campaign style rallies since taking office. Given his preference for the road over the White House, this may suggest that Trump could start his re-election campaign before the first year ends, using rallies to scapegoat Capitol Hill for the lack of progress.
For Asian markets, this suggests that the stronger dollar bias derived from fiscal policy stimulus is likely to fade as priorities for domestic affairs are unlikely to change soon. The weaker dollar should loosen financial conditions, allowing Federal Reserve Chair Yellen some space to manoeuvre gradual interest rate normalization as transitory inflation appears to linger longer than expected. These benign market conditions should underpin those supportive factors which help to balance volatility from central bank policies, demonstrated by stable economic expansion over the past year when populist and anti-trade rhetoric were at its peak.
Across Asia, foreign exchange reserves and capital adequacy ratios remain at healthy levels and provide sufficient liquidity, paring back actions taken by global central banks when markets worry over another taper tantrum. Looking at the remainder of Trump’s first year in office, challenges remain; however, any near-term correction in Asian markets should be viewed as an attractive entry point given that the current policies implemented aim to support the medium and longer-term outlook. While the TPP and the Paris Accord serve as only two points in Trump’s administration, it only takes two points to draw a straight line.
Assistant Fund Manager - Asia