Markets have moved to reflect expected policy changes in the US as the Trump administration begins to take shape. The policy agenda put forward by the Trump campaign could be highly disruptive to the global economy and investors are worried about this. The US has been the dominant force in global geopolitics and economics since the end of the World War 2.
The inward pivot put forth as the ideological anchor of the incoming administration, and the uncertainty around what exactly this administration will do as the years unfold has increased policy risk everywhere.
The coming period will be highly unpredictable, however; prices across all assets have so far been reflective of the core tenets of Trump’s economic and geopolitical doctrine. Among other things, the Trump campaign promised to reduce taxes; reduce regulations on businesses from oil drilling to bitcoin; improve government efficiency by cutting the bureaucracy; drastically reduce and even cut illegal immigration to the US; and increase tariffs on imports from China, Germany and Mexico.
Over and above this, Donald Trump has promised the American people he will reduce US involvement in global conflicts, and use his energies to advance the interest of the country as opposed to fighting on behalf of other nations. Nato’s reliance on US support has, for example, now come into question. The new administration would not have the same approach to the conflict in Russia/Ukraine and the Middle East.
We are still to see how the America First agenda plays out in the multilateral organisations which undergird global geopolitics and the global economy, including the UN, G20, IMF, and World Bank. How the US engages in these organisations will have a profound impact on conflict resolution and global financial arrangements, from climate finance to sovereign debt resolutions and everything in between.
Trump’s tariff promises, if implemented, will help the country’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, the S&P 500 and Bitcoin have gone through the moon.
However, Trump’s economic agenda 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. 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.
Unfortunately, the US dollar is still the world’s funding currency, and a surge in the dollar and increase in US rates is not good for the rest of the world. Assets of countries outside the US have not done well. The threat of higher trade barriers has undermined assets from China to Europe and Mexico. The outlook for the rest of the global economy outside the US has dimmed. Commodity prices have weakened, reflective of this depression in sentiment because of the US election and lousy Chinese economic growth and policy news flow.
Will 2025 play out like 2017 or will emerging markets underperform with Trump in the White House? What happens next will depend not only on the policy decisions of Trump and Co but also on what leaders in other countries, most especially China, decide to do. The market appreciated the Chinese pivot towards supporting its economy in September, but has so far been underwhelmed by the specifics. Will President Xi Jinping and his Communist Party finally pull out the stimulus bazooka?
With policymaker changes, 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. After a post-election surge, the US dollar weakened over the course of 2017 and emerging market assets were better than fine. That said, 2025 might not be as safe.
The global economy excluding the US is much weaker now than it was in 2016, and Trump’s agenda is not only more radical but might be better executed. His alliance was also more conventional than the people he is carrying into the coming administration. We have clearly entered a period of high uncertainty and caution is warranted.
• Lijane is Standard Bank global markets trading strategist
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