Politicians in the market-place ? Some midweek musings ......

Politicians in the market-place ? Some midweek musings ......

ref :- General

It's only Wednesday but it's clear who'll go down as the prime movers and shakers of markets this week  --  British PM Theresa May and US President-elect Donald Trump (but of course).

Mrs May gave a long-awaited speech in which she clarified her plans for Brexit (to some degree), and Mr Trump was ..... well, Mr Trump. He said that the US dollar was too strong, whilst at the same time getting in a dig at China for artificially weakening the Yuan / Renmimbi. Both had fairly dramatic effects in  currency markets, with Mrs May's words prompting the largest one-day rally in sterling since the financial crisis.

As we often say, politics and economics are intrinsically intertwined and there has seldom been a time when markets have been driven by politics as directly as they are now. The link is inescapable but that doesn't mean to say that politicians should involve themselves in market dynamics. As a general rule, not many of them (not even some finance ministers) understand markets as opposed to broader economic principles often learnt briefly in a classroom, and history is replete with examples of politicians getting burnt by market moves.

As some of you may know, our personal favourite (ah, those were the days) is Gordon Brown, then quite recently appointed UK Chancellor of the Exchequer, broadcasting his intention to sell Britain's gold reserves. It's not his decision to sell all the UK's gold coming under scrutiny here (we'll leave that for another time), but the quite astoundingly naive decision to let the whole world in on it. The price was duly marked lower as Mr Brown's impending sales weighed over it and Mr Brown ended up selling his (sorry, the UK's) gold , 395 tonnes of it, at at average price of $275 per tonne between 1999 and 2002. Immediately afterwards of course gold began its inexorable rise higher, never to see those levels or anything like them again. It remains an object lesson in how not to trade, and some people like to think that the reason Mr Brown got the soubriquet "the Iron Chancellor" is that it must have been the metal he was selling for all the money he got for it.

Anyway, it's possible that on this occasion Mrs May has been rather smarter, or at least her advisers have. News emerged last weekend, particularly in the Sunday Times, that Mrs May was indeed going to make clear her plan in her speech on Tuesday, and it was going to take the form of a (very) "hard" Brexit. It was also acknowledged that it was likely to have a negative impact on sterling. GBP /` USD immediately lost about 2c on Monday (going below $1.20 in Far East trading). When the PM confirmed what can only be described as a "hard" Brexit in her speech on Tuesday, the bad news was already factored into the market. It was a classic example of "Sell on rumour, Buy on fact". Sterling not only turned round but with additional conciliatory words from Mrs May and a market-friendly commitment to let parliament vote on the final deal, the pound made its biggest one-day gain since 2008, a rise of 2.7% and above $1.24 at one stage.

Assuming this was deliberate strategy on the part of the May team, this was neatly done and leaves her smelling of roses, comparatively speaking .... which is just as well as Mrs May was getting an unfortunate reputation for provoking collapses in the currency every time she opened her mouth. Harsh, and not without a grain of truth. But the trouble with manoeuvring markets with verbal interventions is that the effects are usually short-lived. GBP / USD is already back below $1.23 and for all the clever plans well-delivered, basic fundamentals will ultimately dominate market thinking.

For most, but not all, that thinking remains bearish  --  Deutsche Bank has targeted  $1.06 for example  --  and it might be a while before those bears can see past continued political uncertainty and a current account deficit that so far has refused to derive any benefit from the weaker currency.

Donald Trump however is a different case entirely (surely the most redundant observation of the year so far). He's been banging on about the dollar being too strong, although it's not absolutely clear whether he means the value of the dollar generally or against the Chinese Yuan specifically. Whatever his point, his words have been effective in weakening the dollar and attempts to engineer a weaker currency fit perfectly into the arch-protectionist trade position that Mr Trump has assumed. The trouble is that the dollar had already begun to labour as a lack of detail meant that doubts have been raised about the new administration's looser fiscal policy. You know the one : higher infrastructure spending and lower taxes lead to higher growth, inflation and rates.

 A consequence of that kind of policy is almost certainly a stronger currency, which would be something of a dilemma if Mr Trump is going to follow through on his promises. Anthony Scaramucci **, a hedge fund manager and the sole representative of the incoming administration, said yesterday in Davos that Mr Trump's ambitious 3%-4% growth targets can be reached even with a stronger dollar. Mr Trump may have to hope so, else he might be forced to choose between having his cake and eating it. On the evidence so far, that's not something that would come naturally.

** One could hazard a guess that the reason that there is only one delegate from the new administration in Davos is that it is exactly the sort of gathering of the elites that good populists loathe. That's fair enough .....  but how that tallies with the populist leader appointing a bunch of  big hitters from Goldman Sachs to his team escapes us, we must confess.