In spite of all the sound and fury that surrounded them, markets ended up taking the US mid-term elections in their stride.
While not exactly magnanimous following the loss of control of the House of Representatives, President Trump didn’t show himself up in too intemperate a light, aside from the summary dismissal of his own appointee Jeff Sessions as Attorney General.
Markets took the relative good grace in which these results were received as a positive factor in an already positive dynamic: the general thinking among investors and market watchers is that division in the branches of government in the US is good for the economy.
That’s because with Congress divided, government’s power to intervene is limited, and that allows for the economy to continue unchecked by political and bureaucratic meddling.
That’s the theory, at least.
Of course, this time round the economic and political context is slightly different. President Trump has initiated a break with the long-standing liberal and globalist policies of several of his predecessors, and is instead involved in some high-stakes brinkmanship around terms of trade and tariffs.
In particular, China has been in the firing line, which has allowed for the unlikely spectacle of President Xi Jin-Ping presenting himself as the new champion of free trade. The Chinese rhetoric may not be matched by reality, but the aspirational goals of China are certainly to embrace much more of the world’s economic resources, as is clearly spelled out in its much-vaunted Belt and Road policy.
So, what will President Trump do next?
The US economy is not reliant on exports in the way that China is, which allows him some room for manoeuvre, and which presumably gives him confidence when he talks of putting tariffs on every single one of China’s imports.
On the other hand, there are certain areas of the US domestic economy are dependent on wider factors, for instance farming, which has been suffering incommensurately under the newly emerging tariffs regime, but which thus far is still broadly pro-Trump.
In mining and manufacturing the effects are mixed. The gold price eased off slightly following the mid-terms as the attractiveness of the traditional uncertainty hedge paled in the face of the results. For the time being at least gold will go back to its inverse relationship with the US dollar, reacting to the Fed’s plans to raise rates.
Uncertainty may rear its head again if Mr Trump re-starts his rather one-sided war of words with Fed chair, Jerome Powell who, like Mr Sessions, is a Trump appointee.
Mr Trump wants a weaker dollar to help exports, but economic analysts are worried that although the US economy is doing very well, productivity is growing at a slower rate than wages and new employment. That’s a dynamic that could lead to inflation and the creation of a bubble that would only burst messily down the line. The prescription? Incremental rate rises.
Where you sit on this argument is moot at this point. What will be more interesting is how Mr Trump will react if the Fed keeps to its policy and the US dollar remains strong. If the war of words becomes increasingly violent then there could be renewed volatility in the markets.
If, on the other hand, Mr Trump and the Fed reach some sort of modus vivendi then markets will sit back and cruise towards the next election in two years’ time in relative comfort. There is plenty of analysis to show that markets perform better after mid-terms, and that they perform better with at least one branch of Congress at odds with the President.
Under those conditions metals prices may recover strongly, as the continued economic strength of the US sucks in raw materials, and global demand continues too. In particular, if Mr Trump manages to reach an accommodation with China, then the uptick is likely to be sharp.
Global stocks in some metals, like zinc, are already low. The thinking is that it’s only the uncertainty around the trade war that’s keeping prices down. If that threat could be removed, and if the Fed is allowed to proceed unhindered, metals prices could be in for a strong run in the next year or so.