News of the week summary - 11/10/2024
Report: What the new Trump presidency means for financial markets and the global economy
Following Donald Trump’s election this week, financial and economic analysts are closely examining how his policy agenda could influence the global economy and financial markets. His administration is anticipated to implement a series of reforms across trade, fiscal policy, corporate regulations, and foreign relations, each likely to have ripple effects on markets and the economy. In this report, we'll take a look into these potential impacts.
International Trade
One of the central mechanisms of Trump’s trade policy is his strong preference for bilateral trade deals over multilateral agreements, which he perceives as limiting US flexibility and influence. This focus on bilateral negotiations allows the US to leverage its economic power more effectively, often placing stringent demands on trade partners. For example, Trump’s administration may revisit the use of tariffs as a negotiation tool, possibly expanding them to broader sectors beyond traditional manufacturing, affecting global supply chains and raising costs for both U.S. businesses and consumers.
In particular, tariffs targeting Chinese imports could intensify economic decoupling efforts between the US and China, pushing American companies to shift manufacturing operations to other countries or even domestically. While this would theoretically support US industries, higher production costs could result in inflationary pressures. Furthermore, retaliatory tariffs from trade partners may emerge, shrinking markets for US exporters, especially in sectors like agriculture and technology, and could also strain the World Trade Organization (WTO) as trade disputes mount.
If Trump were to effectively implement the tariff threats he emitted before his election, we can anticipate reduced trade flows with the US, which would be particularely harmful for the Chinese economy, as it is currently facing weak domestic demand and is partially reliant on Western consumption of its exported goods to fuel its GDP growth.
Currency Markets
The dollar’s value is influenced by both US interest rate policies and international trade expectations. Under Trump, the dollar may experience volatility due to policy uncertainty, especially if his administration pushes for interventions to support US exporters. For instance, past actions demonstrated Trump’s willingness to publicly advocate for a weaker dollar to benefit exporters (as a weak dollar makes American prices relatively cheaper for foreign buyers); this could be repeated, particularly if he seeks to offset the effects of protectionist tariffs.
Furthermore, potential fiscal expansion through tax cuts or increased spending (as announced during his campaign) would likely contribute to a stronger dollar, as foreign investors will seek to invest in the therefore higher-yielding US assets, driving up demand for the dollar to cunduct these investments. Conversely, if trade tensions escalate, foreign investors may reduce dollar-denominated investments in favor of other currencies, weakening the dollar in the short term. Another key factor is Trump’s potential influence on the Federal Reserve, where he could push for a more dovish stance to maintain lower interest rates to boost the economy through increased lending. Pierre Olivier Gourinchas, chief economist of the International Monetary Fund, said that if Trump was to question the Federal Reserve's independence from the government, it could spark fear in financial markets, leading to a partial sell-off of American assets and the dollar.
Inflation
Trump’s policies could influence inflation through both supply-side and demand-side pressures. On the supply side, tariffs would raise the costs of imported goods, particularly from China, which could pass through to consumer prices. If significant tariffs on manufacturing inputs, such as steel or semiconductors, are reintroduced, domestic production costs may rise, ultimately impacting consumer prices on items ranging from automobiles to electronics.
Additionally, if Trump enacts deregulatory policies, they could have a deflationary effect on certain sectors by reducing compliance costs for businesses. For example, deregulation in the energy sector could lower the cost of domestic oil production, reducing fuel costs for businesses and consumers.
Companies and the Financial Sector
The corporate landscape under Trump is likely to benefit from a deregulatory push, particularly in industries like technology, finance, and energy. For instance, Trump’s stance against ESG (Environmental, Social, and Governance) criteria in corporate decision-making could lift some constraints on lending and investment activities in these sectors. A rollback on ESG considerations may encourage investments in traditional energy sectors and certain manufacturing industries by lowering compliance burdens and reducing capital allocation toward renewable projects, which may temporarily boost traditional energy stocks.
In the financial sector, Trump’s potential advocacy for interest rate caps on consumer credit could compress profit margins for banks reliant on high-interest credit products. Additionally, a reduction in global financial regulation could weaken cross-border coordination, as seen with Trump’s previous opposition to certain international financial regulations post-2008. This splintering of regulatory standards could make it harder for financial institutions to operate across borders, creating a fragmented financial landscape. Financial stability could also be threatened if deregulation fuels speculative investments, echoing the conditions that led to the 2008 crisis.
Stock Market and Bond Market
The equity market has reacted positively to Trump’s election, with the S&P500 surging to an all-time high after his win.
In the long-term, the new president's tax policies and regulatory rollbacks are poised to benefit stocks, as reduced corporate taxes and lighter regulation historically correlate with higher corporate earnings. Trump’s policies are expected to favor capital accumulation by corporations, potentially leading to increased share buybacks and higher stock valuations.
Conversely, bond markets may face upward pressure on yields if Trump’s spending policies increase fiscal deficits. Higher deficits would likely lead to more Treasury issuance, which can drive yields up as the government competes for investor capital. This dynamic could affect both corporate and government bond spreads, as investors demand higher compensation for increased risk, especially if inflation accelerates due to tariff policies. Moreover, tighter credit spreads, which often signal investor confidence, may loosen if political uncertainty surrounding policy implementation grows.
Conclusion
It is for now unclear how far Donald Trump will go in implementing the policies he has announced during his campaign. As he makes his staff picks in the coming weeks, it will be more clear in which direction American economic policy is headed, notably if he was to appoint Government hawks like Elon Musk at the head of a federal commission against regulation for instance. Other countries' reactions to new tariffs and geopolitical advancements will also be crucial in determining where the global economy and trade will evolve.
China unveils a new stimulus package
On Friday, China announced a 10 trillion yuan ($1.4 trillion) debt relief package aimed at easing local government debt burdens, addressing persistent economic strains rather than directly stimulating economic growth. This move, unlike previous large-scale stimulus efforts, seeks to restructure local governmental debts rather than inject immediate funding into the economy. The package allows local governments to restructure “hidden debts” accumulated through various local financing channels, saving them approximately 80 billion dollars in interest over five years.
Local governments, heavily affected by declining revenues from property sales due to a prolonged real estate slump, have faced rising financial strain, prompting wage cuts for civil servants and delayed payments to private companies. As a result, the Chinese economy has seen limited cash flow into real sectors, risking further deflationary pressures (when prices drop, leading to reduced economic activity). With China's 2024 growth target of 5% at risk, this relief package aims to stabilize finances by converting “hidden debts” into official debts, though it’s unlikely to spark immediate economic growth.
The relief package coincides with the re-election of Donald Trump, whose potential tariff hikes on Chinese goods could intensify China’s economic challenges by making Chinese exports more expensive and less competitive. China has responded by expanding export credit insurance to support its trade sector, yet many analysts believe more substantial consumer stimulus will be needed. With weak household spending (currently below 40% of GDP) and sluggish wage growth, further economic support may be essential to encourage spending.
The package, though substantial, has disappointed investors who hoped for more direct fiscal stimulus to reflate the economy and support consumption. Analysts predict additional fiscal measures in 2024 to help shore up China’s economy, particularly if tariffs rise.
Bank of England announces second rate cut
The Bank of England (BoE) announced a second interest rate cut since 2020, lowering rates from 5% to 4.75%. This decision reflects the BoE’s cautious approach, following early signs of easing inflation pressures in the UK economy, despite inflation remaining above the 2% target. The recent UK budget, which emphasizes spending, is expected to lift inflation by nearly half a percentage point over the next two years, extending the time it will take to sustainably return to the target. However, the BoE noted that economic growth might see a temporary boost of 0.75% next year due to budget measures, though this effect is not expected to significantly influence growth in the longer term.
Governor Andrew Bailey emphasized that rate cuts would proceed gradually to avoid overstimulating inflation, but he left room for accelerated cuts if inflation undershoots projections. With the budget raising employers' costs through measures like increased VAT on private school fees and social security contributions, inflation is forecasted to rise to around 2.5% by the end of 2024 and 2.7% by the end of 2025. Meanwhile, concerns about global risks, including potential US tariff policies under President-elect Donald Trump, could limit the pace of cuts. The financial markets remain cautious, expecting the BoE to proceed more slowly with rate cuts than the European Central Bank and the Federal Reserve.
Global food prices rise to 18-month high
Global food prices have surged to their highest level in a year and a half, putting additional strain on household budgets and complicating central banks’ attempts to manage inflation. According to the UN Food and Agriculture Organization (FAO), the food price index surged past 127 points in October, marking a 5.5% increase year-on-year. Key staples like vegetable oils, wheat, cheese, and sugar have seen significant price hikes, driven by weather events that have reduced output and tightened supplies. For instance, vegetable oils rose by 7.3% month-on-month, while sugar and dairy increased by 2.6% and 1.9%, respectively.
This rise in food prices is notable across G7 countries (US, UK, France, Japan, Germany, Italy, Canada), with food price inflation ticking up in September for the first time in two years. This trend presents a substantial challenge for central banks striving to bring inflation closer to their 2% targets. While consumer inflation has generally fallen since the peak levels of 2022, rising food costs are causing renewed inflationary pressures. In the US, for instance, annual food inflation hit 2.3% in September, and consumer inflation expectations rose to 5.3% in October, driven by anticipated rises in food and services costs. Similarly, in the Eurozone, food, alcohol, and tobacco prices increased at an annual rate of 2.9% in October.