Leaders leading – whatever next?;   May’s speech ends uncertainty: Brexit means Brexit;   Q4 Earnings preview: US financials off to a good start;   UK property: is the market reaching a temporary peak?;   European Central Bank: no news is good news;   The Unpopular Populist

Leaders leading – whatever next?

The combination of President Trump’s policies seems irreconcilable. At the very least the uncertainty that is produced by the recognition of this problem might lessen confidence in achieving the greater expectations now priced in the markets.

We said at the end of last year that we might go through a period where growth expectations would take a step back and that the US dollar might fall back somewhat. We’re not bearish for prospects – we just think investors may get slightly less optimistic over the next few weeks.

May’s speech ends uncertainty: Brexit means Brexit

At Tatton, our interpretation is that the Premier’s speech re-established a degree of certainty after a long period of upmost uncertainty. It needs to be remembered that, straight after the referendum, it appeared that the Brexit camp had no cohesive plan whatsoever and all their figureheads were refusing to pick up the poison chalice of executing what they had campaigned for.

Markets really do not appreciate such uncertainty. We should always remember that ascribing a singular reason to markets moving does not mean that it is necessarily the cause, as markets are made up of many investors all with their individual viewpoints.

Q4 Earnings preview: US financials off to a good start

We think that better financial earnings are an encouraging sign, as they generally lead to further economic improvements. With banks feeling more confident in the backdrop, they are more likely to lend to businesses and consumers, which could spur further economic growth.

The prospect of an additional two Fed rate hikes in 2017, while still uncertain, could result in a further 3-5% upside to EPS estimates for financials from current levels.

Given the strong rally in equities at the end of 2016, valuations have correspondingly moved higher and investors may now want to see evidence that earnings are actually improving. We think that Q4 could provide some reassurance in the underlying backdrop. Analysts currently anticipate further EPS gains in 2017 (around +9% globally, up from 3% seen in 2016) and a better world economy, combined with rising commodity prices, might help drive accelerated earnings. The big unknown at present is how the political situation (Trump, elections in Europe) might impact markets. But, a more benign outcome could act as a further boost for stocks in the longer-term.

UK property: is the market reaching a temporary peak?

With record lows in both mortgage rates and interest rates, the Bank of England may find it more difficult to prop up the property market, should prices begin to falter. The government could potentially reduce frictional issues like stamp duties and provide supportive measures like additional funding programmes like Help to Buy.

The combination of reduced real income growth and a softer labour market from Brexit-related uncertainty is likely to have a knock-on (if delayed) effect on the property market. We still believe that further increases in prices during 2017 are still possible, but these are likely to be relatively modest in relation to previous strong gains.

European Central Bank: no news is good news

In deciding to pull back asset purchases to €60bn per month, and notwithstanding the ECB’s generally cautious tone, the ECB is perhaps signalling that there is now “some light at the end of the tunnel”; the EZ economy is finally approaching a turning point. The ECB were careful to describe the move as an adjustment as opposed to an end, or exit, from QE. Nonetheless, the ECB’s policy is gaining traction, to the extent that bank lending and credit continues “to expand at a robust pace across all loan categories”.

The Unpopular Populist

In fact, Trump is the only President-elect on record whose inaugural approval rating is lower than their share of the popular vote, with the latter coming in 6% higher at 46%. With such low favourability, the Trump administration will undoubtedly be under pressure to deliver results soon. Of course, one may wonder whether approval ratings should be of any concern to a President who just gained a shock victory in an election. After all, Trump is at least 4 years away from needing to worry about the public liking him, right?

Click here to read the full Tatton commentary