Change of government in the USA
Donald Trump's second term in office begins with a bang on the financial markets. While US equities soar, there are mixed reactions in Europe and the Emerging Markets.
Euphoria for US equities
In the weeks leading up to the US presidential election, the capital markets began to price in a Trump victory. However, after the Republicans not only won the White House, but also majorities in the Senate and the House of Representatives, the US stock markets reacted with downright euphoria. The three most important US equity indices climbed to new record highs, with equities of banks, the steel industry, and defence companies rising in particular. In the past two weeks, however, the US equity indices have largely given up these gains again.
Mixed feelings elsewhere
In Europe, reactions were more muted, mainly due to fears of new tariffs and trade barriers to the detriment of European companies. Emerging Market equities reacted with uncertainty and in some cases with declines, as investors feared that a protectionist trade policy under Trump could weaken growth and exports in Emerging Markets. Some countries, such as India, were less affected thanks to a less export-dependent economy. India could even benefit from Trump's tough stance towards China. On the other hand, countries such as Mexico, which are heavily dependent on trade relations with the US, have seen sharper declines in equities and currencies.
Related article: Investing in US equities
Bond markets react predominantly negatively
The bond markets reacted with price declines and yield increases, particularly for longer maturities. In the wake of Trump's victory and in view of the still very robust economic and labour market data, the markets priced in another round of interest rate cuts by the US Federal Reserve (Fed). The prospect of fewer interest rate cuts than originally expected and a new wave of the "America First" policy caused the US dollar to rise further.
What could Trump bring for the financial markets?
Most of Trump's second term in office is currently still speculative. Assessments of the impact on the capital markets are therefore correspondingly uncertain. In the short term, the equity prices of companies that benefit from the Trump administration's deregulation and the relocation of production capacities back to the US could rise in particular. In the longer term, however, there are risks from new tariffs, trade barriers and inflation. Although the financial markets have already priced in some of this, they have not priced in the scenario of massive US tariff increases across the board.
In turn, equities could react with relief, especially outside the US, if US President Trump acts less aggressively here than currently feared. The same could happen on the bond markets if Trump succeeds in allaying concerns about inflation risks and the independence of the Fed. The US dollar could remain strong for the time being. However, it is already very expensive from a fundamental perspective and could weaken significantly further down the line.
Until both concrete measures and a framework for future trade and fiscal policy are communicated, major price fluctuations on the financial markets must be anticipated. And as was the case during Trump's first term in office, one must be prepared for sudden changes and contradictory statements.
New tariffs across the board?
There are two camps in this regard: one believes that these tariffs will only be imposed to a very limited extent and that Trump will primarily use them as a means of exerting pressure. The other assumes that these tariffs will indeed be imposed, both on China and on Europe and other countries/regions – and that Trump will (partially) lift them at a later date after making concessions to US trading partners.
One argument in favour of this is that Trump has a strong incentive to deliver something quickly to his voters following his many election promises. What speaks against it is that this would, in all likelihood, also mean lower economic growth and potentially higher inflation for the US and, contrary to Trump's hopes, the additional government revenue will not come close to plugging the budget gap. At least the US equity markets have not currently priced in such a scenario of maximum tariff increases.
For the Emerging Markets, but also for Europe, new US tariffs across the board would be a new growth risk. The majority of analysts seem to be of the opinion that the European markets have at least partially priced in Trump's tariff plans. However, the exact impact remains speculative, as the actual implementation and level of the tariffs and any countermeasures are still unclear.
Explosion of US government debt?
The Biden government has spent much more than it has taken in during its time in office. Although this has stimulated the economy, it has massively increased both the government's debt and interest expenses. Persistently high deficits could keep yields on US government bonds high or even cause them to rise further. This would make it more expensive for many companies and governments around the world to raise capital. Lower US budget deficits would dampen economic growth on the one hand but could lead to falling capital market interest rates and thus support companies and consumers. The US economy is currently expected to grow by more than two per cent in 2025. This will be driven primarily by productivity gains, extensive investment in artificial intelligence, electrification and bringing production capacity back to the US.
Fiscal policy: U-turn or "business as usual"?
Trump's first term was characterised by rising budget deficits (with a focus on tax cuts and high military spending). There is little evidence that his priorities have changed. An extension of the tax cuts from Trump's first term in office, which would otherwise expire this year or in 2028, seems largely certain. The US Congress estimates an additional USD 4.6 trillion budget deficit over the next 10 years if these tax cuts are extended. However, the announcements from the Trump camp to very quickly cut around two trillion dollars from US authorities and ministries have already been partially revised again. Persistently high budget deficits are currently the most likely scenario and the US bond markets also appear to be adjusting to this.
New conflict between Trump and the Federal Reserve?
Further deregulation is largely certain, but the details are unclear, particularly in the financial sector and with regard to environmental standards. This could have a positive impact on share prices, particularly in the manufacturing sector (energy, industry) and the financial sector. It is unclear whether and to what extent Trump wants to or can reduce the independence of the US Federal Reserve (Fed). Analysts believe that Trump will not reappoint Jerome Powell as Fed Chairman, leading to uncertainty about future monetary policy. If the Fed is perceived as less independent, this could unsettle the bond markets (potentially higher inflation) and lead to significant fluctuations on the currency markets as well.
Dollar strength coming to an end?
In the short and medium term, there is much to suggest that the US dollar will remain firm. The euro could still fall to parity with the US dollar or even slightly below. However, Trump switched to a weaker US dollar during his first term in office. This could happen again this time - especially if the strength of the US dollar weighs on the US economy. Fundamentally, the US dollar is already very expensive, which means that it could fall significantly in the long term. However, it seems premature to take a position now.
The fund Raiffeisen-Nachhaltigkeit-US-Aktien exhibits elevated volatility, meaning that unit prices can move significantly higher or lower in short periods of time, and it is not possible to rule out loss of capital.