Trump won: What comes next?

Some brief takeaways from Trump’s big win in the US election

Donald Trump received a far stronger result than expected, embarrassing pollsters for a third time in a row who suggested that the vote would be extremely close. He even looks set to win a clear majority of the popular vote nationwide for the first time. We don’t have a full electoral college picture, but it looks like Trump will win all seven of the swing states and most of them by comfortable margins, unlike the incredibly close votes in select states in 2016 and 2020.

The US Senate gets large Republican shift. The Republicans were expected to take the Senate and eliminate the Democrats 51-49 control, but it looks like they will have 54 or even 55 seats, removing the risk of a more moderate Senator or two blocking the president’s agenda.

House of Representatives picture still uncertain. Before this election, Republicans had a very narrow majority of 11 seats out of the 435, so if the Democrats can gain five seats, they can block Trump’s agenda on the deregulation, taxing and spending fronts, if not on foreign policy and tariffs.

Critical: The outcome of the House elections is critical, in short, for whether we have a Trump gridlock or Trump 2.0 scenario. If it goes down to the wire with a couple of seats in slow-counting California the difference, we could be in for days. Any Republican majority in the House could be extremely small, presenting some fragility to the Republican majority and ability to get things done, while any Democratic majority would likewise be very small and require extreme discipline to block the Republican agenda.

How the market is reacting:

Markets are generally reacting as many would expected in a Trump victory scenario and had been putting on the “Trump trade” in recent weeks as the presidential race seemed to be tightening strongly in his favour, at least according to betting odds. The presumption is that Trump will bring new tariffs on countries exporting to the US, especially China, and that he will bring tax cuts and deregulation if the Republicans retain control of Congress.

Equity markets: US stock markets rose overnight as Trump’s overwhelming strength across the board became clear. The move in the small-cap Russell 2000 index (nearly 6% as of this writing) was more than twice the size of the advance in the main large cap indices like the S&P 500. Europe was lower overnight at one point but has rallied this morning. Note that small caps should only benefit in the Trump 2.0 scenario, which is needed for fresh corporate tax cuts to pass Congress.

Specific equity sectors:

Positive impacts: The Tesla shares listed in Germany are up more than 14% as Musk’s heavy contributions to Trump’s campaign could mean he has bought influence on shaping future regulations for autonomous vehicles operating on US streets. Some risks for Tesla on Trump’s threat to EV subsidies, however. Some defence companies in Europe are reacting positively, likely on the fears of less Trump commitment to NATO allies. Germany’s Rheinmetall was up strongly today in early trading, though the action there and in other European defence names is mixed and the market isn’t seizing on this theme. Ford’s German shares were also up, presumably as the country can look forward to better terms of competition in the US where most of its revenue is made. US financial companies and big banks may get a boost on hopes for eventual Trump deregulation moves. Construction companies in infrastructure and energy are also interesting to watch – the biggest names there being Fluor and Mueller Industries.

Negative impacts: US retailers will be interesting to watch in relative performance terms as they would have to hike price on consumption goods, most of which are imported – but there has been no signs of fear in this sector lately when as Trump’s winning odds improved. European exporters like German car companies opened weaker on fears of Trump tariffs hitting revenues down the road. Alternative energy companies like Danish wind power giant Vestas and power company Orsted were also punished on the European opening. Hong Kong stocks were down overnight as Trump has threatened particularly large tariffs on Chinese imports, but the losses were modest.

Bond yields: US treasury yields rose across the board on the anticipation that a Trump administration brings more inflationary risks via a pro-growth agenda of tax cuts and deregulation, which could see more leverage in the financial sector. It could also bring higher treasury yields through significantly larger deficits as some calculations suggest that a full Trump 2.0 agenda could add on the order of USD 5-7 trillion of further deficits over the next decade. In Europe, yields actually dropped quite sharply, perhaps on the threat to European growth from Trump tariffs. 

The US dollar: The US dollar has surged across the board. It was interesting to note that it rose more against the euro than against the Japanese yen, as many feared the latter would be more sensitive to the US election as the yen is traditionally more sensitive to moves in the US treasury yields. Japan has a far larger trade relationship with the US than Europe as well as a percent of the Japanese economy. The Mexican peso was also sharply lower, about 2.3% as of this writing, having recovered about a percent from its worst levels. The fear for Mexico is likewise that Trump tariff policy will discourage companies from producing in Mexico and exporting to the US.The Chinese yuan was also weaker versus the US dollar as Trump has singled out China for especially large tariffs. 

What to watch from here

Besides the critical question above on whether we get the full Trump 2.0 or a Trump gridlock scenario (especially important for whether the big move in US small caps is justified as per above), we also have to watch out for the risk in the US at the end of the year and into the new administration if the debt ceiling does into effect on January 1. This can create market disruptions, although only in a gridlocked Congress scenario after the first of the year.

Otherwise, it is critical to continue to track the US treasury market and whether bond yields continue to ratchet higher. At some point, higher yields could begin to act as a headwind on equity prices, especially if they threaten to rise back to the highest levels seen last year above 5% in the 10-year treasury yield. And how will the US Federal Reserve behave now that the US election outcome is known? Any inflationary resurgence will remove further policy easing expectations. The Fed meets tomorrow and is expected to cut the policy rate 0.25%, but could soften up its commitment to further easing, if without directly referring to Trump and his administration’s likely agenda. The Fed would want to avoid changing directions again next year.