A clear victory for Donald Trump in the US Presidential election, held on 5th November, was welcomed by markets. The Presidential victory is likely to be combined with Republican victories in the Senate and House. The expectation of further tax cuts, a rollback in regulation and lower energy costs are perceived as beneficial for equities, and the US economy more broadly. Conversely, the expectation for higher inflation, and potentially higher government bond issuance, has caused bond yields to rise. The US dollar has strengthened.
The magnitude of the moves so far has been significant but not excessive, approximately 3% in equities, and a 14bps rise in the 10 year US Treasury. While these shifts are notable, over the span of a quarter, or a year, they will easily be lost in wider volatility. Investors will now be keenly watching for policy announcements and appointments from the Trump camp, prior to the official handover in January.
A potential area of concern is China, which is likely to be the primary target of the Trump tariff policy. While the exact strategy is yet to be refined, import costs into the US are likely to increase, weighing on bilateral trade between the world’s two largest economies. Europe is likely to be hit with additional tariffs too. Global trade flows and inflation (both positive and negative in different regions) will be factors to watch.
Overall, a Trump presidency will lead to a number of policy changes which will impact the US, global economy, and markets in different ways. Investors will be anticipating greater political volatility and should expect more frequent market reactions to political events.
