After all the twists and turns of the most acrimonious US presidential campaign in living memory, the electorate has chosen to reject the status quo and embrace the populist agenda of Donald Trump.
Beyond its impact on the domestic political order, the Republican candidate’s victory will have major implications for economic growth and geopolitics. Trump’s control of Congress gives him significant scope to enact at least some of his most contentious policies; the reality TV star and real estate mogul can also force much through emergency decree, should he choose to.
We expect markets to continue the ‘risk-off’ swoon first seen in reaction to Trump’s early gains in the key battleground states of Florida and North Carolina. Equities are likely to drop further, especially in those emerging markets with close trade links to the US. Fresh weakness in Asian currencies is also likely, as the region plays a huge part in the global supply chain, while many of its economies need to delever after a huge build-up in debt following the financial crisis.
US Treasuries are likely to hold on to their early gains as investors seek perceived haven assets; however, given the likely inflationary impact of Trump’s policies, German, UK and Australian sovereign debt will probably outperform over the next few days.
In the medium term, US government bonds are likely to sell off, with the curve steepening, as the inflation stoked by Trump’s spending initiatives – and the bond issuance necessary to pay for them – weigh on the curve. The Republican seeks to deliver a fiscal stimulus worth trillions of dollars, through a combination of infrastructure spending and some tax cuts, alongside protectionist trade measures and steps to lower immigration.
The president elect has talked about imposing tariffs immediately on imported goods that he believes have been subsidised, and would encourage the US Treasury to label China a currency manipulator. Retaliatory measures are probable. Trump also wants to renegotiate the North American Free Trade Agreement (particularly with Mexico) while the Trans-Pacific Partnership trade treaty among Pacific Rim nations would not be ratified.
Still, we believe that tariffs placed on foreign goods and services might not work; and in any event, Trump may struggle to marshal them through congress, despite his dominance in its two chambers. He will likely succeed in enacting fiscal stimulus, though, which would support risk assets.
Crucially for investors, the outlook for the US Federal Reserve (Fed) has become clouded. The central bank may well refrain from raising interest rates in December, as heightened uncertainty over the direction of macroeconomic policy under Trump is likely to curb spending by households, as well as hampering business and trade.
The Fed could actually tighten policy if the central bank believes the fiscal easing pursued by the Trump administration will have more than a transitory impact on inflation. Adding to the uncertainty, however, is the possibility that Janet Yellen may not remain as in her post as Fed chair, due to the suspected animosity between her and the president elect.
Of course, the medium-term picture remains somewhat murky, as Trump might not make good on many of his campaign pledges in the face of opposition from his advisers or Congress. Until we gain more clarity on what the 45th president is able and willing to do, investors will need to brace for what is likely to be quite a ride for markets and the global economy.