What is Trump? - July 2016

In the long list of market unknowns, Donald Trump and the US Presidential race is a “known unknown.” His candidacy has massive implications both socially and for the markets, but we are not sure of what they are.

 

The word “trump” has always held significant meaning. In cards, it outranks all else, and in life, it is used to show that you have an advantage over others.

 

As a surname, Trump is of English origin and has historically served as an occupational name for a trumpeter (from the Middle English trumpe or “trumpet”), which is an apt description for Mr. Donald J. Trump if you think about it. Since announcing his candidacy, Trump and his stances have taken centre stage both in America and abroad.

 

For America, and the world, the last name Trump is more than a word or strategy. Despite the criticism that invariably follows his comments, his campaign is no longer a political diversion. Simply put, he has a very real shot at the presidency.  But should anybody be surprised?  Like him or not, the man is savvy. He is adept at connecting with the masses through social media, and the nicknames he gives his opponents stick (i.e. “Lying Ted” and “Crooked Hillary”). While some may debate the appropriateness of his morally-grey strategy, his appeal to a wide range of Americans is no longer at question – whether you personally agree with his perspective or not.

 

It is difficult to gauge the effect that a Trump win would have on the financial markets given his reliance on rhetoric, and his lack of a decisive policy or plan at this time. The degree of uncertainty he has introduced to the world is high, and the domestic and international upheaval it may create is concerning.  As a result, it is highly likely that the ongoing volatility experienced across both the financial and commodity markets will continue for quite some time, and may even intensify.

 

In the long list of market unknowns, Trump and the US Presidential race is the unknown. The result of the election may have massive implications on the markets, even if we are unsure about what they are. When looking to commodities, a weaker US dollar will drive prices higher, but this may be offset by concerns over a slowing US economy. More broadly, a Trump win could have the following effects on specific markets:

 

  • Equities: given the high level and multi-year rally, along with and artificially low VIX level, we expect significant volatility.
  • Precious metals – likely to remain positive, reflecting heightened uncertainty and geopolitical risk.
  • Industrial metals – investors may become bullish as it is expected that Trump would call for increased spending on infrastructure.
  • Agriculture – prices of vegetables could rise if strict immigration policies affecting illegal workers are implemented, while the effect on global grains is difficult to determine.
  • Energy – prices could go either way, depending on Trump’s protectionist agenda and political policies.
  • Canadian Oil – as the largest foreign supplier of oil to the US, Canadian crude may continue to increase in importance given Trump’s desire to secure a safe supply for America, and his pro-pipeline agenda.

 

While Trump wants America to be energy independent, a Canadian supply of crude should be looked at favourably when compared to other sources. Moving away from Mexican and other South American heavy sour crude suppliers would provide advantages beyond safety and ethics. Pricing for these imports are not generated by transparent, open market systems, but rather set by their respective governments.  As such, risk mitigation tools like hedging are simply not available to market participants as they are for those who purchase Canadian oil.

 

As in life, you can only use a trump card once, and often as a last resort. Donald Trump has a very real shot at being elected because many voters see him as exactly that – a last resort. He has only one chance at this. Like Ross Perot, there will likely not be another run.

 

Donald Trump is clearly good at blowing his own horn, and a Trump presidency would certainly herald a period of significant volatility for the world’s commodities and financial markets.