Trump could sway Brexit negotiations – Franklin Templeton

Added 29th November 2016

Donald Trump’s win may inspire further surprise political outcomes in Europe, according to Franklin Templeton.

Trump could sway Brexit negotiations – Franklin Templeton

David Zahn, head of European fixed income at the group, describes a crowded political stage across Europe, with the already-high levels of political uncertainty following the EU referendum outcome and Trump’s recent election victory set to rise.

He said the French and German elections in 2017 present further potential for unexpected outcomes and is anticipating a “slow but steady” recovery across the continent.

“It will be interesting to see whether populist candidates in the German and French elections gain increased support following Trump’s victory in the US. In terms of the more direct impacts for Europe arising from a Trump administration, these seem likely to centre on trade and international relations.”

A key area where Trump may have influence is over the Brexit negotiations between the UK and the rest of Europe, he said, although flagged that his policies will not take effect for some time.

“During his campaign, Trump was a vocal supporter of Brexit, and the policies he adopts once in the White House might cause EU leaders to partly reconsider their approach to the UK’s departure," Zahn said. “For instance, Trump has taken the stance that overseas US partners should increase military spending, and we might see the UK and Europe wanting to maintain a more united approach in this area, given the UK’s relatively large military spending compared with Europe.”

Zahn warns that the UK’s intent for a ‘hard Brexit’ could threaten its chances of an “optimal outcome”.

“Candidates running for office in France and Germany would, we think, be reluctant to advocate overly favourable terms to the UK. Not only would such a deal likely be negative for the UK economy, but also its impact for the EU may be underestimated. A continental European economy that is growing only slowly could ill afford to lose such a trading partner, in our view.”

Eurozone inflation looks set to pick up in 2017 but will likely still fall short of the European Central Bank’s 2% target, he said.

Zahn said growth in the region looked positive compared to historical trends, yet due to poor demographics, would likely remain stable for the year ahead, having started from such a low base in early 2016.

While the slump in energy prices drove inflation into negative territory at the start of this year, eh said things are recovering and expects inflation will rise further throughout the next 12 months as that recovery is priced in.

Further, the commentary from Trump about his plans for fiscal spending may also raise inflation in the US and elsewhere.

Zahn added: “Nevertheless, with inflation in the eurozone starting from such a low base in early 2016, the rate in 2017 will remain, in our view, some way short of the ECB’s target of 2%.”

In the face of such headwinds, he believes the ECB’s accommodative approach to monetary policy will remain as he does not think policymakers would risk threatening the region’s “fragile recovery” with a tapering of QE.

Looking to the fixed income markets, Zahn believes bond yields will remain “anchored” by the ECB’s monetary policy and is looking forward to the attractive investment opportunities that often come with phases of heightened volatility and the resultant dislocation in markets.

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