Quarterly Outlook
Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?
John J. Hardy
Global Head of Macro Strategy
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Potential impact of the US election on financial asset classes
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As the US elections draw near, financial markets, including foreign exchange (FX), fixed income (bonds), and commodities, are bracing for possible disturbances.
Here's an exploration of how differing policy approaches could influence financial asset classes and products.
Trade policy:
Both candidates may continue to advocate for US protectionism. However, Trump's proposal of imposing a 60% tariff on Chinese imports suggests a more drastic approach, reflecting a significant escalation in protectionist measures.
Impact on forex (FX) markets:
Escalating tariffs could be inflationary, strengthening the USD as it becomes a more attractive asset amid global uncertainty. This could negatively impact the currencies of economies directly affected by these tariffs, such as the Chinese yuan (CNY) or the euro (EUR), as their trade balances might suffer.Impact on the bonds market:
The expectation of higher inflation from trade disputes might lead to an increase in the term premium of US Treasuries. This scenario could result in a bearish steepening of the yield curve if the Federal Reserve hikes rates to counteract inflation. Over time, however, if protectionist policies tighten credit conditions domestically, it might lead to increased investment in domestic enterprises, temporarily reducing credit spreads before potentially widening again due to renewed inflation concerns.Impact on the commodities market:
The imposition of significant tariffs on imports from China would exacerbate the fragmentation of global trade. This could lead to an increased focus on reshoring and friend-shoring production that requires a number of key commodities, driving up their demand and prices further.Geopolitics:
A Democratic administration would likely aim to reduce geopolitical tensions and foster international cooperation, while a Trump administration might escalate tensions by taking actions such as reducing US support for Ukraine or threatening to withdraw from NATO.
Impact on forex (FX) markets:
The prospect of heightened geopolitical tensions under Trump could increase the demand for the USD as a safe haven, especially in times of international uncertainty. This could exert downward pressure on the euro (EUR) and the Mexican peso (MXN) as their economies face increased geopolitical risk.Impact on the bonds market:
Geopolitical tensions could also affect bond markets by increasing inflationary pressures on both sides of the Atlantic, enhancing the attractiveness of US Treasuries as a safe haven asset and potentially moderating the rise in yields. While this may moderate the ascent in yields, it's unlikely to fully offset it.Impact on the commodities market:
Periods of heightened geopolitical tension and potential trade conflicts could increase the costs of production and transportation, supporting ongoing demand for investment metals such as gold and silver. Moreover, energy markets might see increased volatility due to the risk of supply disruptions and heightened sanctions on major oil suppliers, like Iran.Fiscal spending:
The potential policies of a Democratic president could involve higher taxes on corporations and wealthy individuals to manage US debt levels more sustainably.Impact on forex (FX) markets:
Robust fiscal spending could initially support US economic growth and strengthen the dollar. However, mounting debt concerns might eventually lead to a significant sell-off in the USD as investors worry about long-term yield increases.Impact on the bonds market:
The US bond market might react in a nuanced manner to increased fiscal spending. Concerns about fiscal deficits might lead to a spike in yields, particularly in shorter-dated securities, while longer-dated maturities might see increased demand as they are perceived as less risky in terms of immediate default.Impact on the commodities market:
Higher fiscal spending and increasing debt-to-GDP ratios could heighten concerns about the sustainability of US debt, thereby supporting prices for tangible assets like gold, which are often viewed as safe havens during times of fiscal uncertainty.Monetary Policy:
A Democratic administration would likely uphold the Federal Reserve's independence, contrasting with Trump's critical stance on the Fed's recent rate hikes and his suggestion of not renewing Chairman Powell’s term.Impact on forex (FX) markets:
Any perceived political interference in the Federal Reserve's decisions could undermine the central bank's independence, potentially weakening the dollar as market credibility falters.Impact on the bonds market:
Political interference in monetary policy could lead investors to seek safer assets outside of US Treasuries, likely causing a sell-off in Treasuries and an increase in yields, which lowers bond prices.Impact on the commodities market:
The perceived risk of a policy mistake due to compromised central bank independence might lead to higher inflation expectations or diminished confidence in US financial assets, further boosting the appeal of commodities like gold and silver as protective investments.Overall, the results of the US election can have an impact on the global markets. However, it is hard to predict what exactly will happen. If you decide to adjust your investment portfolio based on the US election, it is crucial that you keep yourself updated on how it progresses. Pay attention to key events throughout the election period and be aware of how each candidate is positioning themselves.
To stay informed on how the US election is shaping up in relation to financial markets, you can check for updates on Saxo’s US election news hub.
This article was updated on 07/05/2024.
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