Considering the almost immeasurable amount of uncertainty that keeps investors constantly on the edge of their seats, markets are susceptible to sudden reversals and twists of fate. Amongst the many factors that helped oil prices rally last week was the war Israel wages against Hamas and Hezbollah. In a somewhat sudden and unexpected U-turn, the news broke yesterday afternoon that a ceasefire agreement, initially possibly for 60 days, between the Jewish state and the Lebanese paramilitary group is within grasp and can be finalized in the next few days. Oil was sold off, Brent fell $2.20/bbl in the space of 2 ½ hours and never recovered
The reaction to this welcome development was natural and understandable, yet it is unlikely to put protracted pressure on oil prices by itself. Firstly, it must be noted that during the 13-month conflict oil supply from Iran or other Persian Gulf producers has not been affected. The erosion yesterday, therefore, was a sizeable fall in risk premium, fears of disruption were mitigated but no extra barrels are forthcoming - unless, of course, OPEC decides to unwind voluntary production constraints on Sunday. Secondly, seasonal factors could also put a floor under the market as embodied in the half-hearted bounce observed this morning. Another supportive factor last week was the revival of gasoil and heating oil, which was triggered by falling temperatures in the northern hemisphere and by rising natural gas prices, something that is still conspicuous. Thirdly, Donald Trump’s pick of Scott Bessent for the position of Treasury Secretary was greeted by a weaker dollar and a rush into bonds and equities although the sentiment hastily soured overnight. Mr Trump felt invigorated and pledged levies on all imports from Canada, Mexico and China as a retaliation for illegal immigration and drug trafficking. By any means, the potential truce in the Near East is a propitious progress. It is in the region’s interest to see it implemented, nonetheless, the global oil balance remains as is.

Equity Market as Checks and Balances

The formation of the new US administration, which will take office on January 20 next year, is well underway. It is quite intriguing to observe that those who played any role in the first Trump administration between 2017 and 2021 are nowhere to be seen. It insinuates that the incoming president was anything but content with the support he was afforded to execute his controversial social, political and economic agenda. It is also noticeable that in the new cabinet, loyalty takes priority over competence. Several former Trump critics were pardoned and appointed to critical positions. The other curious aspect of the new government is that those who contributed significantly to Donald Trump’s election campaign, financially or politically, have been richly rewarded. Below we outline the most important appointments considering the four main pillars of the Trump programme: deportation of illegal migrants, tax cuts, tariffs and deregulation. We will also examine the changes that could sweep the US energy sector.

Tom Homan has been appointed as the border tsar and he is tasked with carrying out Trump’s election pledge to ‘…run the biggest deportation force this country has ever seen’. He was the acting director of Immigration and Customs Enforcement and is the proponent of a zero-tolerance policy on immigration. He will be in charge of deporting roughly 11 million undocumented migrants, most of whom are long-term residents and form a pivotal part of the US workforce in sectors such as agriculture, construction and hospitality. Deporting them is a Herculean and most likely impossible undertaking. In succeeding to do so, the US labour market would considerably tighten, driving up wages.

Over the weekend and after a few days of tug-of-war, Donald Trump nominated Scott Bessent to the position of Treasury Secretary. He is a Wall Street financier, who is viewed by the market as a comparatively safe pair of hands, who might mitigate some of the harmful effects of Donald Trump’s ‘America First’ promise. Yet, he advocates the extension of the tax cuts implemented during the first Trump term but views tariffs as a negotiating tool, rather than the ultimate target. He will also oversee deregulation, which will impact sectors from cryptocurrencies to banks and energy.

Florida Senator Marco Rubio was picked as the Secretary of State and as a consolation prize for being overlooked for the position of Treasury Secretary, Howard Lutnick, the CEO of Cantor Fitzgerald will run the Commerce Department. The former will attempt to end the war between Russia and Ukraine, which, in his own words, will entail ‘some very difficult choices’. Given that he voted against the $6 billion military aid for Ukraine it is obvious what his choices are. He, together with Lutnick, will also oversee the implementation of tariffs on China and other nations that run budget surpluses with the US.

Another notable appointee is the Tesla/Starlink boss, Elon Musk who donated generously to the Trump campaign and will be responsible for cutting $2 trillion from government spending. (The US discretionary budget is $1.7 trillion; therefore, the target seems delusional.) Peter Hegseth, a Fox News host with no political background and experience will lead the Pentagon. Science antagonist and vaccine sceptic Rober F Kennedy Jr will be at the helm of the Department of Health and Human Services.

It is noteworthy that on the energy front, Big Oil’s influence has severely diminished. International oil companies warned the president-elect not to roll back the Inflation Reduction Act and not to tear up climate policies. On the other hand, shale producers are jubilant after the decisive Trump win and founder-CEO of Liberty Energy has been appointed to run the Department of Energy. In his view climate activists are alarmists and he denies that a climate crisis exists. Re-withdrawing the US from the Paris Climate Accord has become a realistic proposition and so has the opening of federal lands to drilling in the name of US energy dominance, which, in the language of the incoming administration refers to increased oil output, something that will probably be shaped by market forces rather than deregulations.

The political and economic policies of the second Trump government are protectionist and inward-looking. One might even go as far as labelling it myopic. Yet, the result of the election handed an undeniably strong mandate to the Republican party to carry out its campaign promises, especially since they control all three branches of the government for at least the next two years. The silver lining is that given the significance Donald Trump attaches to the stock market, a downturn in equities might just force him to seriously water down his seemingly inflationary policies.
 

Overnight Pricing