Fast reading
- After the election result was announced, the blue-chip S&P 500 closed up 2.5% on Wednesday, with banks and oil companies performing strongly, while the tech-heavy Nasdaq Composite gained 3%.
- Bond investors have reacted cautiously to the election result, amid concerns that sweeping tariffs – coupled with other proposed policies such as corporate tax cuts and the deportation of millions of immigrants – could lead to a surge in inflation at a time when the US Federal Reserve appears to have price rises under control and has begun its rate cutting cycle.
- Trump’s victory poses potential risks to the Chinese economy and raises the possibility of an escalation of trade tensions with the US. China’s benchmark CSI 300 index has remained steady following the election result.
Donald Trump’s decisive victory in the US presidential election on Tuesday sparked a stock market rally as well as a sell-off in US Treasuries as investors bet that the new administration’s policies would boost equities but also push up inflation and increase the deficit. The US dollar, meanwhile, rose by as much as 2% on Wednesday against a basket of rival currencies1.
“There was a lot of concern approaching the election that it could be dragged-out and heavily contested given how narrow the gap was in the polls,” says Martin Todd, Senior Portfolio Manager – Sustainable Global Equity, Federated Hermes Limited. “The immediate reaction has been market relief at a decisive result.”
The blue-chip S&P 500 closed up 2.5% on Wednesday, with banks and oil companies performing strongly, while the tech-heavy Nasdaq Composite gained 3%2. Both indices are now at all-time highs.
Figure 1: Nasdaq hits all-time high
“There are a lot of different opinions on which sectors, business models and geographies are ‘winners’ or ‘losers’ from a Trump administration and a potential Republican majority in both houses of Congress,” Todd adds. “But this is hugely dependent on the time frame. Understanding the medium- or longer-term implications for equity markets is incredibly challenging given the many second-, third- and fourth-order consequences of every policy announcement.”
Rising yields
The divisive former president returns for a second term with the support of a Republican-controlled Senate, as well as potentially the House of Representatives.
President-elect Trump has pledged to impose a broad range of taxes on imported goods to protect domestic industries and this has raised concerns that his tariffs plan could lead to volatility. Global currencies such as the euro, the Mexican peso and the Japanese yen slid against the dollar following the election result. Meanwhile, the yield on the 10-year yield US Treasury reached 4.42% at 13:00 GMT on Thursday3. The yield on 30-year US government debt hit 4.6% – the highest level for four months.
Figure 2: US borrowing costs on the rise
Bond investors reacted cautiously to the election result, amid concerns that tariffs – coupled with other proposed policies such as corporate tax cuts and the deportation of undocumented migrants – could lead to a surge in inflation at a time when the US Federal Reserve appears to have price rises under control and has begun its rate cutting cycle.
Initial market moves following the election result are risk-on globally
“Initial market moves following the election result are risk-on globally, and rates wider in the US in anticipation of a Republican sweep. This is in anticipation of a tax and regulatory friendly administration with little resistance likely to come from the other branches of government,” says Mitch Reznick, Group Head of Fixed Income, Federated Hermes Limited.
“Rates are wider on an incoming US administration that is perhaps more deficit-agnostic than the alternative. As the US deficit relative to GDP increases, the cost of borrowing rises, hence the widening.”
Trade war risk
Trump’s victory over Democratic nominee Kamala Harris also poses potential risks to the Chinese economy and raises the possibility of an escalation in trade tensions with the US. While China’s benchmark CSI 300 index remained steady following the election result4, this may change.
“The US election result could lead to a bigger stimulus and a faster response from the Beijing government,” says Sandy Pei, Senior Portfolio Manager – Asia ex Japan, Federated Hermes Limited. “It’s obviously not the first time tariffs from the US have been a potential issue and this time around Chinese companies are more prepared. We have seen many companies diversify their production bases, setting up plants in Southeast Asia, Mexico and Eastern Europe. Exports from China have continued to grow, increasing to other regions of the world, while decreasing to the US.”
Please see our latest EMD report for further insights on the foreign policy implications of a Trump presidency 2.0.
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1 Bloomberg as at 7 November
2 Ibid.
3 Ibid.
4 Ibid.
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