Financial markets are fully focused on the US election results and the implications thereof. President-elect Donald Trump’s tariff promises, if implemented, will help the US’s balance of payments and thus the dollar and equities. The promised fiscal stimulus, if delivered, would favour US over global growth. This election result has bolstered risky US assets and the dollar.
The “Trump trade” is playing out exactly as expected. The dollar is up 5.4% on a trade-weighted basis, and the S&P 500 up 4% from late September lows. Unlike previous equity rallies, this one is broader than just the tech names. The equally weighted Russell 2000 index reached levels last seen before the start of the US Federal Reserve’s hiking cycle in November 2021.
Most agree that the economic agenda as outlined by the Trump campaign would be inflationary and the less dovish Fed rate path reflects this. Interest rate markets unwound some of the rate cut expectations they had priced in for the Fed. Markets removed 100 basis points worth of the cuts they had discounted pre-election. The Fed funds rate is now expected to fall to 3.8% into the end of 2025, compared with the 2.8% floor priced in during September. The long end of the US curve has also drifted higher, reflective of expected fiscal deterioration, better near-term growth and, linked to this, rising inflation risks.
Trade and fiscal policies, if carried out to the extremes proposed by the Trump campaign, would eventually be terrible for the US economy and the dollar. However, markets are focused on their effects on near-term growth. Investors might be betting that policy will be titrated to get mostly the good economic effects while minimising the bad or that things will be a lot better before they go bad.
As expected, emerging market assets have derated relative to US assets. Chinese authorities’ incrementalism on policy stimulus has not helped. The rand initially held its own even as the dollar rallied, consistent with a China-stimulus-triggered commodity price rally and the SA Inc reallocation now under way. A third disappointing China stimulus announcement this weekend undermined the positive commodity narrative, and the rand has weakened in response. Local equities have done little better, losing 3.9% post US elections. Local rates have, however, continued to gain relative to US treasuries even after the elections.
Many worry that global markets will be unhappy, with the dollar stronger and emerging markets underperforming with Trump headed for the White House. This is not what happened in 2016. Risky assets were supported in 2017. The dollar weakened over the course of 2017, after a brief post-election rally into the end of 2016. US equities strengthened into 2017 in response to expanding GDP growth. The rand did quite well over the period, gaining 5% against the dollar into March 2017. That said, the 2017 rally might not be repeated in 2025. Unlike now, the global economy, excluding the US, was doing much better then. China was in full stimulus mode, growing at 6.9% in 2017 compared with the 4.5% expected in 2025. Europe was also relatively strong, registering growth of 2.6% in 2017 compared with the 1.3% expected in 2025. What happens to growth in countries outside the US is going to matter a lot for how the next year in financial markets plays out.
Other than the policy decisions of Trump and Co, those of other country’s leaders, most especially China, will be critically important. The market appreciated the Chinese pivot towards supporting its economy in September but has so far been underwhelmed by the specifics. Chinese leaders must now also contend with the threat of the intensification of its trade war with the US. Will they pull out the stimulus bazooka? A lot will depend on the answer to this question. With different policymakers, policy pivots and policy wars in the two most important economies in the world, economic uncertainty is about as high as it can ever be.
• Lijane is global markets strategist at Standard Bank CIB.
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