State of the Union 2018

Donald Trump’s first State of the Union address is scheduled for 30 January 2018. What is it and how could it affect the markets?

What is the State of the Union address?

The State of the Union address is an update given by the president of the United States to a joint session of Congress, generally given annually except in the first year of a new president’s term. It includes a budgetary and economic report, and also gives the president a chance to outline their previous successes, legislative agenda and future priorities. 

When is the next State of the Union address?

The next State of the Union will be given as a speech by President Donald J. Trump on Tuesday 30 January 2018. Though official timings have yet to be announced, it likely to start at around 9pm EST based on previous years (2am on the morning of Wednesday 31 January 2018, UK time).

The Democrats will broadcast a response to the State of the Union address following the president’s speech, as has been customary for the opposition party since 1966.

Why is the 2018 State of the Union address important to traders?

The State of the Union address always offers valuable insights into the president’s economic and political priorities. This year is particularly pivotal, though, as it will be Trump’s first State of the Union speech and follows a volatile first year in office. Traders will be watching to assess:

Policy

Trump is expected to make statements on a wide-range of policy issues, including:

  • how he assesses his first year of reforms
  • his plans for the years ahead
  • his vision for America

He may use this year’s speech to announce major reforms to trade, infrastructure, healthcare, or welfare policy – all of which are under review. 

The opposition reaction

The opposition reaction to Trump’s speech will also be key. Republicans have a razor-thin majority in the Senate and will require some support from Democrats to pass certain bills. There are also elections for the House of Representatives this year, which have the potential to further undermine his position. So it is possible that Trump’s speech will be more conciliatory in tone than some of his previous speeches, though that does not guarantee it will be well received.

The future of the presidency

Though he is unlikely to address the future of his presidency directly, the speech offers a chance to see whether Trump comments on concerns over his mental health and the FBI’s ongoing investigation into Russian collusion in the US election. Any comment risks adding fuel to the fire, which could undermine confidence in the president and play into market sentiment regarding his plans.

How could this year’s State of the Union address affect the markets?

Trump’s 2018 State of the Union address could well touch on a wide variety of topics. However, the key themes for the markets are likely to be:

  • Infrastructure: Trump is planning to rejuvenate US infrastructure, including transportation networks (airports, bridges, highways, and railroads) and energy networks. He is currently working to formulate a plan worth up to $1 trillion over the next ten years, so it is possible that details of this plan, and its possible effects on the US economy, will be outlined during his speech
  • Immigration: Trump is currently calling for Democrats to back $33 billion in funding to secure the Mexican border (including $18 billion for the wall) in exchange for Republican approval of the DREAM Act, which would give certain illegal immigrants a path to residency. He could use his speech to call for bipartisan support of both issues
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  • Trade: the president has promised to protect national sovereignty over trade policy, enforce US trade laws, open foreign markets, and negotiate new and better deals – but detailed plans have yet to surface. Could his speech pave the way for trade reforms, or even a hard-line ‘trade war’ against China, a country he perceives to be engaging in anti-competitive practices? It’s certainly possible, but some analysts think it unlikely given that Beijing’s cooperation is critical to the ongoing UN sanctions against North Korea

So, how might the markets react to Trump’s first State of the Union address?

Forex

The dollar has been volatile throughout Trump’s presidency and has often tracked his comments closely – falling on several occasions when he asserted that the dollar as ‘too strong’ compared to the Chinese yuan. Of course, it could also strengthen if Trump announces major government spending programmes, such as a new infrastructure plan. 

Look out for any comments from Trump on the dollar, trade or infrastructure, and watch how pairs including EUR/USD and USD/CNH react.

Indices

The Wall Street, US 500, and US Tech 100 indices have all risen over Trump’s first year, buoyed by tax cuts and investor confidence, though some argue this is little more than a continuation of a bull run that started under Obama. Despite this, US indices are likely to respond to comments by Trump on trade and infrastructure reforms, particularly if his comments appear favourable to American firms. 

Commodities

Gold and Silver are said to have an inverse relationship with the dollar (when the dollar is weak, gold is often strong and vice versa), so these commodities could mirror market sentiment regarding the dollar. Commodities used in manufacturing and construction – such as aluminium and copper – could receive a boost if Trump announces infrastructure reforms. 

Shares

Trump’s plans are likely to affect the outlook for a range of different sectors, which could cause individual shares to rise and fall. Infrastructure reforms would likely have a positive effect on construction and logistics firms, while military and healthcare spending could affect shares in these industries. And the introduction of any protectionist trade policies could positively impact a range of domestic industries including American steel manufacturers, while having a negative effect on international firms.

Bonds

Bond prices are likely to be affected by how Trump’s economic policies are perceived, particularly if there is a potential impact on interest rates in the short or long-term. If he announces high levels of spending, for example, this could stimulate the economy, leading the Federal Reserve to raise rates in the long-term. Watch bonds including the US Treasury Bond and US 10-Year T-Notes.

How to trade the State of the Union address

Before

As certain details of the State of the Union address are released in advance (sometimes even the entire statement), markets often price in expected headlines ahead of the address itself. Traders wishing to capitalise on the opportunities created by the speech should therefore pay attention to communications from official channels, including White House press briefings and Trump’s Twitter feed, which could offer clues on what to expect from the big event.

During

Any difference between expected and actual announcements made by the president during his speech could have a big effect on the markets. However, it is worth noting that Trump stuck fairly closely to script during his last speech to a joint session of Congress in February 2017, so it is perhaps less likely than normal that he will veer ‘off-piste’ on this occasion.

After

Traders should be aware that the Democrats’ official response to the speech, which is likely to be broadcast shortly after Trump speaks, could affect market sentiment. This is especially true for markets that could be affected by policies that are likely to require bipartisan support.

Finally, it is worth noting that Trump’s vision for America – and the reaction to it – could affect years or even decades worth of policies, so the speech could offer clues on the long-term outlook for the markets.

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