Trump inauguration is reality check for markets

In a few hours, just after City traders switch off their screens, Donald Trump will suddenly become Mr President. Inevitably, his presidency will continue to divide opinion, as he has since that shock election victory 10 long weeks ago.

Investors we've talked to like Trump's straight-talking and will continue to invest in American shares. Others are more sceptical. At the pow-wow of economic and political elites in Davos, billionaire investor George Soros called Trump a "would-be-dictator".

"I personally have confidence that he's going to fail … because his ideas that guide him are inherently self-contradictory," argues the hedge-fund manager.

For global financial markets, Trump's inauguration comes at a time when stocks already look expensive and the dollar trades at multi-year highs versus other major currencies. Brexit has dumped sterling to a three-decade low against the greenback.

Of course, both could go higher still, but the realistic upside potential is shrinking, while the drop on the other side continues to grow.

It's why nervous investors, already sitting on fat profits after a stunning run since the election - the FTSE 100 made as much as 500 points and the S&P 500 almost 7% - worry that Trump could start doing real damage now.

"At this stage the reflation trade (buying assets that will benefit from higher inflation) has strong momentum as investors jump on the Trump band wagon," says Keith Wade, chief economist at Schroders.

"However, the impact of the new president's fiscal policies will not be felt until end-2017 and into 2018. There are some tricky waters to be navigated before they take effect.

"At present markets do not seem to be anticipating problems either in terms of delays by Congress, or in boosting growth significantly. Such optimism is likely to be questioned: prepare for a reappraisal of the Trump trade."

If Trump and his untested team deliver on economy-boosting policies, investors may not start sellingThat said, key indices might be jumpy but they haven't given up much ground. The FTSE 100 is still less than 150 points off its best ever level, while the S&P is within striking distance of a fresh high.

Despite some selling, no one wants to call this rally over prematurely, and indices remain near record highs.

If Trump and his untested team play a straight bat, and at least begin to deliver on economy-boosting policy promises, investors may decide not to sell equities. After all, where will that money go?

This president's first 100 days will be more critical than any other in living memory. It won't take much to convince investors trying to squeeze more juice out of this bull market to give up and watch the drama unfold.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.