What is next after Donald Trump’s inauguration? January 23, 2017

Donald Trump’s inauguration last Friday on the 20th January was truly a significant moment in US history. From his speech, it could be inferred that protectionist policies might be implemented with further emphasis coming from his “America first” and “Buy American and hire American” taglines. He announced that US would be quitting the TPP (Trans-Pacific Partnership), and that they would renegotiate the 1994 NAFTA (North American Free Trade Agreement), which is in line with what he have said so far, as well as analysts’ expectations. Though these moves could potentially grow the US domestic job market and economy, it may weaken US’s global presence and international ties.

Based on what Mr Trump has said so far, investors may want to take note on his intention.

1) America First Energy Plan

Trump’s administration removed all mentions of the phrase “climate change” on the official White House website after his inauguration, and stated that they are committed to energy policies that lower costs for America and reduce dependence from importing foreign oil. This would mean that there could be an increase in shale oil production, which has since decreased 700,000 barrels a day from 4.9 million barrels a day in 2015 due to supressed oil prices in 2016. Moreover, the Trump administration has also committed to achieving energy independence from the OPEC cartel. Hence it is logical to assume that should shale oil production increase for self-consumption while imports of foreign oil reduce. US oil prices (WTI) should remain stable due to an increase in domestic demand and reduced foreign supply.

In term of general oil prices, analysts foresee that increased US production would compensate for the cuts from OPEC and its non-OPEC partner countries. They have also indicated that based on experience, there are doubts on whether OPEC and its partners will truly cut the intended average of 1.75 million barrels per day over the 6-month agreement period. The OPEC compliance meeting which happened yesterday on 22nd January stated that a strong start was made to OPEC, non-OPEC oil output cuts. 1.5 million barrels of the stated 1.8 million per day have been taken out of the market already. Should full compliance continue, global oil inventories could go back close to their five-year average by mid-2017, lowering oil in storage by around 300 million barrels. However, this is just the start of the agreement, and time will tell if full compliance could be maintained for a longer duration.

2) America First Foreign Policy

In his inauguration speech, Mr Trump stated that the US will seek friendship and goodwill with the nations of the world, but will do so with the understanding that it is the sovereign right of all nations to put their own interests first. This could effectively mean that the Trump administration would focus more on domestic gains and protectionist trade policies. However it could also mean lesser imports from countries such as China due to huge tariffs that might be implemented. If such tariffs were to be made, a “tic-for-tat” strategy may be implemented by China. This would eventually affect the Asia pacific trades, as China is one of the major importers in the region. Therefore it would be interesting to see how the Trump administration plays out their foreign policies and investors should be wary of any changes to the US’s foreign policies as it would indirectly affect many industries, especially shipping.

3) Monetary and Fiscal Policies

Mr Trump wants to build new roads, highways, bridges, airports, tunnels and railways with American hands and American labour. To do so, his administration would have to increase spending, which would also mean an increase in the interest rate. This is because expansionary fiscal policy will lead to an increase in the size of a government’s budget deficit, and market’s fear on default would push up interest rates on government debt. Moreover he had singled out the Federal Reserves and its Chairman, Janet Yellen on various occasions that she is keeping interest rate “artificially low”. Hence it may be a sign that interest rates may rise soon. On 19th January, Ms Yellen stated that, with monetary policy still modestly accommodative, the U.S. central bank should continue to raise interest rates slowly to keep jobs plentiful and inflation low. She also pointed out that it’s probably not a good idea to allow the US economy to run hot, and that people should be prepared for a series of interest rate increases off into the future, which would be gradual. Hence, analyst consenus of approximately 3 rate hikes this may happen. Investors may want to watch out for the FOMC meeting happening between 31st January to 1st February, to see if there are any plans for rate hikes and how many percent will the hike be.