Trump's Presidency Expected to Benefit the Dollar and Stocks
As Donald Trump prepares for a possible return to the Oval Office, the US dollar and the stock market are expected to benefit, while the bond market and emerging markets, as well as sectors such as clean energy and sustainable investment, are projected to face challenges. Investors anticipate that Trump's policies will likely lead to higher inflation and growth, necessitating the Federal Reserve to maintain high interest rates to prevent the economy from overheating. This scenario is expected to strengthen the US dollar.
Analysts from Citi forecast a 3% rally in the dollar following Trump's victory. The euro might experience a significant drop, potentially falling below 1 dollar, especially if tariffs and domestic tax cuts proposed by Trump are implemented. A depreciation reminiscent of the rapid decline of the Chinese yuan from 2018 to 2020 is also expected. The anticipation of higher dollar yields has paved the way for a return to carry trading, with the Japanese yen and Swiss franc already facing selling pressure ahead of the election. However, the Swiss franc may find some support due to Switzerland's high-value exports and its historical performance during periods of high inflation.
In the cryptocurrency world, Bitcoin might gain under a Trump administration that is expected to adopt a softer stance on regulations. The cryptocurrency reached a new all-time high today.
In the stock market, Trump's promises of deregulation, tax cuts for corporations, increased oil production, and strict immigration policies are likely to support sectors such as banking, technology, defense, and fossil fuels. Goldman Sachs estimates that Trump's plan to reduce the corporate tax rate from 21% to 15% could increase S&P 500 earnings by about 4%. However, the uncertainty regarding how successful Trump's tax cut plan will be in Congress persists. His protectionist stance and tough approach towards China could raise costs for multinational corporations and negatively impact their profitability.
As warned by Barclays, if trade disputes flare up again, European earnings could see "high single-digit" percentage declines. The defense sector in Europe may experience mixed results due to Trump's commitment to ending the Ukraine war while also demanding higher defense spending from European allies.
On the bond front, rising concerns over U.S. government debt levels and fiscal deficits have sparked fears of increasing borrowing costs. Trump's spending plans, which could add an estimated $7.5 trillion to deficits over the next decade, pushed Treasury yields up by about 50 basis points in October. The inflationary pressures from these policies will keep Treasury yields high by limiting the Federal Reserve's ability to cut rates.
Commodities could also be affected; Trump's goal of maximizing U.S. oil and gas drilling could keep West Texas Intermediate crude oil futures prices low. However, the intent to enforce oil sanctions against Iran and refill the Strategic Petroleum Reserve could provide price support. The soybean market is already feeling the impact, with prices declining 25% compared to last year amid trade tensions with China.
Emerging markets are preparing for potential challenges such as tariffs on Mexican auto imports and taxes on remittances proposed by Trump's vice-presidential candidate JD Vance. If tariffs are increased, the South African rand, Brazilian real, and stock markets in those countries could suffer. Selling in Treasury bonds and a stronger dollar could pull money out of emerging markets and necessitate tighter monetary policies.
In terms of sustainable investment, Trump's victory could allow for a rollback of green regulations, potentially affecting stocks in the oil, gas, and coal sectors. He has also threatened to cancel funds under the Inflation Reduction Act that could impact subsidies for electric vehicles and renewable energy.
However, any significant steps to drastically reduce stocks in these sectors may require congressional action, and some Republican lawmakers have shown support for parts of the climate law. Trump's promise to dismiss Securities and Exchange Commission chairman Gary Gensler could also hinder the ability of sustainable funds to advocate for policy changes, as these funds have already experienced net outflows since last year due to the relative impacts of high energy prices.