Why were Trump's speeches well received? Rikio Shima's Real-World Live Trading

Publication date: 2017/03/02 00:28

After Trump's speech, the dollar continued to rise and stocks were solid. However, some analysts are wary of the market's reaction, saying the President has not explained anything that should have been explained.

This lack of explanation concerns the funding. We will increase defense spending by as much as 6 trillion yen (FYI, Japan's defense budget is about 5 trillion yen); we will undertake infrastructure investment of 1 trillion dollars; we will implement bold corporate tax cuts and income tax cuts. Even though other budgets will be cut a bit, expenditures seem set to rise by well over 20 trillion yen, but where will that money come from? That is what we want to know, and the market has been adjusting due to concerns about that inconsistency.

However, he managed to get through by not explaining anything! Compared with before, he showed a much more conciliatory Trump, surprising his opponents and leaving them in the fog. On that point, I honestly think the Bannon–Trump pairing is skilled. CNN also reports that about 70% of Americans have a favorable impression.

Additionally, the market's slight bear tilt before the congressional address may have been a major factor. The Nikkei also ran many articles expressing concerns about the congressional speech. Therefore, whatever is announced, it would likely be seen as all materials already exhausted (i.e., priced in).

Also, the market's focus shifting to a U.S. rate hike was probably significant for the currency market. A March rate hike is unexpected.

However, as expectations for rate hikes rise, the dollar strengthens and U.S. long-term yields rise. If that happens, the Trump reflation trade would come back to life. There is a paradox in this market: higher rates end up lifting risk assets, creating a contradictory correlation.

Regarding the fiscal gap, border adjustments, and other items that weren't explained this time, they will keep coming up. Even if you ride it temporarily, money won't suddenly appear, so at some point there will be a moment to decide how to handle the funding gap. However, in the near term the Trump sugar-high rally is likely to continue.

Chair Yellen's speech on March 3 is highly anticipated. Next week's employment report, and the FOMC on the 15th, will be the main focus. Personally, rate hikes and balance-sheet adjustments are likely to be on the agenda. The dollar and U.S. long-term rates will rise. However, there is also a scenario where this would affect stock prices and ultimately lead to dollar weakness and lower U.S. long-term yields.

There is a good amount of near-expiry options around 114 yen. Personally, I would use these options as a hedge to sell above 114 yen and buy back lower a few times, but if there is a big pullback, I may consider buying.