The new American president’s State of the Union address was precisely what markets wanted to hear: measured, moderate, and well-considered rather than improvisatory, provocative and incalculable. As Trump said, the $3 trillion rise in US equity market valuation (nearly 9% on the S&P including this morning’s futures gain) since his election does indeed validate his general approach: deregulate, cut taxes, reduce bureaucracy and so forth.

The tail risk associated with Trump, of course, is trade war. What the president called for last night was free but fair trade: equal treatment for American exporters. His hopes of restoring manufacturing jobs to the US might be exaggerated, but if US policy simply pursues better terms for US exporters, Trump will walk in the footsteps of Ronald Reagan, who talked free trade but imposed quotas. We’ve argued throughout that the odd combination of very low real yields and soaring equity prices reflects this juxtaposition of opportunity and tail risk.  Trump shrunk the tail risk by appearing presidential last night, and equity markets around the world applauded.