ALEX BRUMMER: Wall Street euphoria since Trump victory hard to sustain

The economic tumult of the last ten days has been immense. Labour’s tax and spend Budget, the election of Donald Trump with the prospect of tax cuts and tariffs on imports, and a reduction in borrowing costs on both sides of the Atlantic still are being digested.

There has been a surge in share prices in New York with the S&P 500 Index, the broadest measure of American shares, 50 per cent above its long term average and trading at a remarkable 25 times earnings-per-share.

This, at the moment that the Congressional Budget Office is forecasting that by 2027. US government debt will exceed the record levels seen in the immediate aftermath of the Second World War.

Bond markets in New York and London have been spooked by debt levels. Both the Bank of England and the Federal Reserve will take deep breaths before rushing the fences on deep cuts in official interest rates. Amid all of this, it went almost unnoticed that the government in Berlin has fallen following a row in the ruling coalition over a breach of German debt legislation. 

The European Union faces tempestuous months ahead with its locomotive economy in a slump and suffering political stalemate, with the threat to moderation coming from the Right-wing Alternative for Germany (AfD) party.

To add to the disruption, the Dutch government is having to apologise to Israel after masked gangs attacked and hospitalised Maccabi Tel Aviv football supporters attending their team’s match against Ajax. Israel’s Jerusalem-based Holocaust memorial site Yad Vashem described the anti-Semitic violence as a Pogrom.

Germany’s political crisis was triggered when Chancellor Olaf Scholz fired his finance minister Christian Lindner of the Free Democrats (FDP). The dispute erupted over how to best fund a £10bn black hole in next year’s budget. A problem is not dissimilar to that discovered at the Treasury (and not reported to the Office for Budget Responsibility) when Rachel Reeves arrived as Chancellor.

Lindner proposed putting the brakes on debt by freezing social spending, cutting some taxes and diluting the country’s ambitious climate change goals.

Scholz favoured changing the debt rule so as to keep on funding social benefits and defence spending for the war in Ukraine.

Add to these difficulties the possibility of a trade dispute with the US over tariffs and the slump in car production and Germany and the EU finds itself in a very difficult place. All of this suggests a ferociously uncertain period ahead for global markets. Euphoria on Wall Street, which accompanied the Trump election victory, will be hard to sustain.

Flying by

Shares in British Airways owner IAG are soaring on the back of buoyant transatlantic traffic. But it is not all sunshine for passengers. Routes to fast-growing Middle East destinations, such as Bahrain, are being axed because of capacity shortages.

Instead of offering better service to premium passengers travelling to North America, small things – such as invigorating smoothies for arrivals on the ‘red-eye’ to Heathrow – have been dispensed with.

Investors still have reason for cheer. In the midst of the pandemic, when air traffic died, they could never have imagined the prospect of full year operating profits of £3.1billion or a £292m share buyback. A message, however, for IAG chief executive Luis Gallego: travellers also deserve better.

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