Equities, particularly technological stocks, have rallied from last Friday’s settlement levels. The Nasdaq Composite Index has gained 2%, the S&P 500 index scaled its former summit yesterday. The US 10-year bond yield has retreated from 4.61% to 4.60%. The dollar has weakened, and its index has lost 1.1% of its value over the last five days. Whilst stocks have proved upbeat, oil has corrected south. Front-month Brent has fallen $1.79/bbl, the M1/M7 Brent spread has taken a hit of $1.47/bbl. Admittedly, this downward trend was exacerbated by the 5% price fall in the CME Heating Oil contract as weather-related support gradually evaporates.

The above changes broadly sum up the initial market reaction to Donald Trump’s first two days in office, as he hit the ground running, signed a barrage of executive orders and began to implement his political, economic and trade programmes. The first impression is that the campaign bark appeared worse than the post-inauguration bite. This, however, does not change the view that the new administration will unconditionally stick to the announced inward-looking, protectionist economic plan and will conduct its foreign policies by way of confrontation as opposed to cooperation.

Three main tenets of Donald Trump’s policies are immigration, tax cuts, and tariffs. He wasted no time cracking down on illegal immigration at the US-Mexican border. He declared a national emergency in the southern part of the country and intends to change the definition of birthright citizenship, which will face massive legal hurdles. The extent of the promised mass deportation of undocumented migrants, amounting to more than 10 million, has not been addressed, therefore the impact of the immigration policy on the US labour market is not clear at this stage.

The pledge to make the 2017 income tax cuts covered by the Tax Cuts and Job Acts permanent after the end-2025 expiry and lowering the corporate tax to 15% will probably go ahead although it will be intensely debated in Congress. What has been firmly on Donald Trump’s agenda is the withdrawal from the OECD global tax pact negotiated by the Biden administration with 140 countries, which sets a minimum global corporate tax and his animosity towards the digital services tax labelled discriminatory. The main beneficiaries are US tech companies. Their volte-face from four years ago and their support of the Trump campaign, however pliable, are turning out to be a masterstroke as far as the fortunes of these companies are concerned.

His transactional approach to governing is palpable on tariffs. He reiterated his threats to impose 25% punitive measures on Canadian and Mexican imports, effective February 1. The EU will also face import tariffs unless they ramp up their purchase of American energy. His promise to punish Chinese imports by imposing tariffs of up to 100% has been watered down to 10%, to begin from next month. This, of course, does not mean that further increases will be scrapped. Mr Trump has directed federal agencies to complete a comprehensive review of trade issues, including deficits with trading partners, by April 1.

The effect of Donald Trump’s economic policies, and his protectionist measures, which will possibly entail reciprocal steps from trading partners, are likely to have inflationary effects. The extent of it will depend on the seemingly inevitable trade wars with foes and allies. If his first term is anything to go by, it will be the American consumer that will ultimately pay for the tariffs and taxes in the form of rising consumer prices.

On the energy front, the US president pledged to fill up the SPR, which was depleted during the Biden administration. Current SPR stocks are some 240 million bbls lower than at the end of his previous term. Matching that level would mean around 164,000 bpd of additional demand over four years, provided the replenishment starts today. He plans to aggressively boost oil production and open up federal land for exploration and production. He has lifted the freeze on LNG export permit applications. He withdrew from the Paris Climate Accord despite 2024 being the hottest year on record. He has halted the disbursement of around $300 billion to fund US green infrastructure projects.

Mr Trump has implied that he would stop buying Venezuelan oil. Oil production in the Latin American country is currently around 880,000 bpd, according to OPEC’s secondary sources. Whether the move would meaningfully tighten the global oil balance depends on the practical use of the dark fleet, which, up until last December, successfully transported Russian, Iranian and Venezuelan oil around the globe. OPEC+ spare capacity is always there to fall back on in case of any disruption.

Territorial demands -Greenland, the Panama Canal and Mars- are firmly on the agenda. They fly in the face of Mr Trump’s self-characterization, as a peacemaker and unifier. The best-case scenario is that the refreshingly forthright, ‘not-beating-around-the bush’ and even belligerent rhetoric is simply aimed at establishing reference points for impending negotiations, the worst-case scenario is that it amounts to the brazen use and abuse of US economic and military might. His intention to lift sanctions on Jewish extremists in the occupied West Bank is a strong sign of his unwavering support of Israel and makes the Israel-Hamas truce even more fragile than it has been. Should his stance lead to a tacit nod towards forcing a possible regime change in Iran, oil supply via the Strait of Hormuz might be in jeopardy. A dim ray of hope was presented to Ukraine as his pledge to solve the crisis in 24 hours have been pushed out to 6 months. His warning to Putin that further sanctions are on the cards if no agreement is reached soon went largely unnoticed by the market yesterday afternoon.

The world has never been static, and it is expected to become an even more violent place in the next four years. Predicting outcomes is usually an arduous task and with the new US administration in place, the global stage has tenaciously turned into a zero-validity environment. Yet, the first few days of the old/new President suggest that equities will receive a temporary boost, aided by the technological sector, AI push and deregulation. The gap between the US and other stock markets will widen and so will between equities and oil. The Trump agenda will not support oil demand growth in the near future and will dent it in the medium term. Supply will be adequate unless war breaks out in the Middle East or Russia is cut off. This chasm will stabilize when the inflationary effects of the protectionist policies and the trade wars emerge. Confrontation and hostility will be the zeitgeist of the coming years, and the promised utopia will materialize as something, which is akin to dystopia.

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