Pick Only The Weak Trade Balances, Easy Like Sunday Morning

Issuing decrees is the new tweeting. So far Trump’s pattern has been clear: focus on easy targets first using a very simple rule of thumb: use the trade balance to tell apart US friends from US foes. Hence despite the outcry, the economy and markets are gaining traction.

According to this view, countries with small imbalances to the US are set to receive friendly treatment by the new administration, as explained by Christian Gattiker, Chief Strategist at Julius Baer. In contrast, countries with great trade surpluses to the US make great enemies. Russia and the UK with relatively small imbalances fit the bill of the former and have gotten a nice treat by Trump so far. Mexico and Germany (or rather its car industry) got the exact opposite. Gattiker says:

I do have sympathies with this view as it sounds both in line with election rhetoric and recent empirics. Yet as we just debated in our team: what about the elephant in the room – China? ‘A billion a day keeps the doctor away’ seems to be the exception to the rule as China has been printing an annual USD360bn surplus against the US. Yet so far Donald Trump has not dared to attack it. And certainly not just because it is Chinese New Year. Interesting to see whether he will come back on this one. The size of both the trade balance itself and the amount of Treasuries China holds make it seem rather unlikely.

So the pattern is: bash trade surpluses, but pick only the weak ones as they are the easy targets. Easy like Sunday morning.

So without major disruptions between the US and its most important trading partner, analysts at Julius Baer think the global economy will continue to do what it has started in the second half of 2016: recovering. They expect that investors will come back to this fact after the whole hullabaloo of tweets and decrees settles. So after a reality check and the back and forth in expectations, we expect the major trends to resume. That is higher rates, a stronger USD and outperformance of cyclical stocks. In the meantime, experts closed a tactical opportunity in real estate stocks, so-called bond proxies, and increased our rating for insurance stocks, beneficiaries of rising rates. In conclusion:

We reiterate our preference for the USD in particular against the JPY and for small- and mid-cap stocks. Our technical analysts suggest going for specific single equities.