Former President Donald Trump will return to the White House for the next four years and, with the Republican party also taking the Senate and possibly the House, a “red sweep” is the most likely outcome. Financial markets reacted by extending popular “Trump trades” – pushing up bond yields, the US dollar and equity futures – as investors assign higher odds of Trump turning policy proposals into reality [1].

What will be the policy and impact?

We think the new President may prioritise tariff and immigration policies over tax cuts, as these can be implemented through executive orders without congressional approval. The sequence of policy implementation will be key to assessing the growth and inflation impact. Tariffs will act as a negative supply shock to the economy, increasing stagflation risk – the magnitude of this will depend on the eventual level of tariffs.

[1] Piece finalized 6 November 2024 end of day.
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Monica Defend

Monica Defend

Head of Amundi Investment Institute

Tariffs and immigration will likely be at the top of Trump’s agenda. The highest impact of Trump policies will be on inflation, putting the Fed in a trickier position.

Monica Defend, Head of Amundi Investment Institute

Global implication

US Asia Europe

The economic impact of Trump’s policies will depend on the scale and sequencing of their implementation.

Raising tariffs and tightening immigration (possibly including the deportation of undocumented migrants over time) are negative supply shocks – they will hurt growth but raise inflation – creating stagflation dynamics for the economy. The question is, will Trump deliver everything at once – i.e., hiking tariffs by 60% on Chinese products and 10-20% on everything else, plus deporting 1 million of an estimated 13 million undocumented immigrants? A full and hasty rollout of these policies would be “shock and awe” therapy for the economy and markets.

Conversely, Trump’s fiscal proposal is a near-term positive for growth and inflation. However, the market could challenge the sustainability of US debt dynamics over time.

 

 

The most consequential policy of the new President for the global economy is tariffs. Both the scale and breadth of tariffs touted during the election are larger and more far-reaching than those implemented in 2018 and 2019. With potential retaliation from trading partners, trade war 2.0 could be an order of magnitude more damaging than trade war 1.0.

Our analysis shows that 10% catch-all tariffs, with the risk of tit-for-tat responses, will leave everyone worse off. Such an action could strain economic and political relationships with Europe, undermining future transatlantic cooperation.

China would be the most affected by tariffs. But Beijing can mitigate the impact through negotiation, FX depreciation, trade rerouting and stimulus.”

Besides China, other small and open economies in Asia – such as Taiwan, Korea, Singapore and Malaysia – would also suffer from 1) US tariffs imposed on their products, 2) weaker demand from China, and 3) higher global uncertainty weighing on business investment. However, the Tech sector impact could benefit from US deregulation policies, lessening the negative impact. The large and domestically-oriented economies of India and Indonesia are better insulated. In assessing the full impact, one also has to consider how the reorientation of global trade routes and supply chains may benefit countries like Mexico, India and Southeast Asia.

Trump's victory could push European member states to strengthen defence cooperation, potentially advancing proposals from the Draghi report. The immediate economic outlook for the Eurozone appears more uncertain, especially in light of potential retaliation from the EU to higher US tariffs. However, Trump’s second term in office may yield some indirect long-term benefits, and trigger economic transformation in a region that is typically reactive to shocks. Re-routing of trade routes could help mitigate the impact of tariffs. Within Europe, Germany’s export-driven economy would suffer the most from tariffs.

A Trump victory could push Europe to strengthen defence cooperation and potentially advance proposals from the Draghi report.

What are the implications for investors?

The inflation impact of Trump’s policies will pose risks to fixed income investments, and these could be amplified by concerns about US fiscal sustainability. Current interest rates have already factored in a less favourable outlook on inflation. However, the lack of visibility on the sequence of policy implementation and its impact on the economy makes it difficult to have a strong call on duration. That said, a moderate steepening is expected, given the Federal Reserve's stance. Market expectations for higher inflation and a more hawkish Fed would be positive for the dollar in the near term. However, it is not clear if such a trend can be sustained in light of a further deterioration in the US’s already worrying fiscal trajectory.

The Trump scenario favours a further rotation in equities. Globally, the US benefits from the prospect of lower tax rates. The intersection of Trump's policies may have greater implications for specific sectors of the US equity market, even though it may not be so clear-cut for the overall index.

Sector impact of a Trump victory

US election takeaway

 

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