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Trump’s first 100 days: the market’s scorecard

No president likes being judged on his first hundred days in office, not least Donald Trump. It is, he tweeted last week, a “ridiculous standard” by which to be measured, even though he also claimed to have accomplished “a lot”.

With his 100th day in the White House falling on Saturday, investors have more nuanced ideas. For much of 2017 financial markets have doubted the global “Trump trade”, reversing many of last year’s seismic post-election moves. But some argue that pessimism is now so endemic that even modest progress by the new administration is enough to reignite the rally.

Kevin Russell, chief investment officer of UBS O’Connor, the hedge fund that sits inside the Swiss bank’s asset management arm, argues that the post-election rally was primarily driven by the improving global economy, even as hopes of a “Trump bump” from aggressive fiscal easing and deregulation have vanished. That is now shifting, with the administration promising to cut the US corporate tax rate to 15 per cent.

“One of the biggest opportunities in markets is that there’s immense scepticism about anything getting done,” Mr Russell argues. “There’s little to no policy outcomes baked in.”

The US stock market has certainly regained its footing. The results of the first round of the French presidential election eased concerns over another populist political upset. And there is tentative optimism that the White House and a Republican-controlled Congress will still be able to achieve some kind of corporate tax cut this year.

Few in markets expect the comprehensive tax reform initially promised, but have been heartened by President Trump vowing to axe the corporate tax rate from the current headline rate of 35 per cent to just 15 per cent, even if it increases the fiscal deficit.

The S&P 500 has moved back towards record territory in April, driven by reinvigorated technology stocks, adding almost 1.7 per cent this week.

Renewed hopes are even more apparent in the Russell 2000 and Nasdaq Composite indices, which both hit new records on Tuesday. The Russell tracks small, listed US companies that are more domestically-oriented and would mostly benefit more from tax cuts than the multinational blue-chips of the S&P 500. The Nasdaq Composite also boasts a host of smaller companies and those that benefit from faster economic growth and inflation.

Bob Baur, chief global economist at Principal Global Investors, argues that there has just been a “hiatus” in last year’s post-election trade, which now looks like it could be gearing up again.

“It feels like there will be another leg up for the reflation trade,” he says. “Even small things would be helpful. The change from an administration that didn’t seem business-friendly to one that is could have a big impact.”

The recent, subtle shift in sentiment is filtering into market measures of inflation expectations. The 10-year “break-even” rate — a gauge of investor inflation expectations derived from comparing the yields of conventional and inflation-proofed Treasuries — slid from a January peak of 2.08 per cent to a low of 1.84 per cent last week. But on Wednesday it climbed back to 1.92 per cent.

The shift is also apparent in the bond market, with this spring’s Treasury rally partly unravelling this week. The 10-year Treasury note yield has jumped from a year-low of 2.17 per cent earlier this month to 2.32 per cent on Wednesday.

Nonetheless, investor scepticism is still apparent in the dollar, which has become a reliable market indicator for judging Mr Trump’s impact. The index that measures the greenback against its peers rose 4.4 per cent between the US election and the end of 2016, but is down 3.4 per this year, slipping to a five-month low on Tuesday despite the US stock market’s renewed optimism.

Marc Chandler, a currency strategist at Brown Brothers Harriman, points out that whatever has been accomplished in the first hundred days is irrelevant compared to what can be achieved in the next thousand. But “many market participants appear to have downgraded the chances that Trump’s legislative agenda will be delivered”.

That’s left investors and traders looking for a catalyst to drive the dollar. They found it for the pound in UK prime minister’s Theresa May decision to hold a snap election. They found it for the euro when Emmanuel Macron topped the first round of the French presidential election. Yet the search for something to turbo-charge the stagnating dollar is proving elusive.

Yet even some prominent sceptics of the theory that president Trump will be able to engineer a temporary economic upswing — let alone durable one — say that markets had probably gone too far in reversing bets on an upswing in inflation, pointing out encouraging signs that the global economy is expanding at a tepid but respectable pace.

“Global reflation may stay dormant for a while longer, but it isn’t dead,” Joachim Fels, global economic adviser at Pimco, noted. “My money is on a revival of the reflation theme in the coming months.”