How the Trump Win is Impacting Financial Markets

Wall Street indices hit record highs while the US dollar saw its largest gain in 8 years when Donald Trump was re-elected as the President of the United States. The greenback rose about 1.65% against several currencies, including the pound sterling, Japanese yen and euro. European indices, including the UK’s FTSE 100 and Germany’s DAX, declined on the news.

These were only initial reactions to the news of a second Trump term. As investors digest the news, the markets will likely change their trajectory based on what can be expected from another Trump Presidency. Here’s what you need to know about what experts believe a second Trump term could look like and how that would impact the global financial markets.

Potential Policy Changes by the Trump Administration

From Donald Trump’s promises during his pre-election rallies, economists believe that the Tax Cuts and Jobs Act of 2017 could see some changes, including a reduction in the corporate, individual and capital gains taxes. While this will significantly impact businesses and individuals, it could also increase US debt and federal deficits. However, given that any such changes will first need to be approved by Congress, keeping in mind the balance between expenditure and revenue, the changes to the tax policy could be more conservative than the promises made on the campaign trail.

Unlike tax cuts, trade and tariff policies can be implemented directed through an executive order. If Trump follows through with his proposals of a 60% tariff on Chinese goods and a potential universal 10% tariff, US economic growth could be adversely affected and inflation could rise. In the event of upward pressure on inflation, the Federal Reserve could maintain higher rates for longer, lending support to the US dollar. 

Deregulation is expected to be a key theme of a second Trump term. US oil production is already at a record high. If supply is further increased, it could be a drag on oil prices, although producers of oil and natural gas would benefit. Deregulation might also mean a lower regulatory burden on financial services. Plus, less stringent compliance requirements for the pharma and biotechnology sectors could bolster these industries by accelerating drug approvals. On the other hand, support for fossil fuels could negatively impact the renewables and EV sectors.

Potential Impact of the Trump Presidency on the Financial Markets

The expected policy changes will not just impact the global economy but also move the markets. Here’s how.

The Indices

Lower taxes for corporates, decreased regulatory pressures, higher oil production and a tough stance on immigration could fuel both the US economy and inflation. However, if Trump follows through with cutting the corporate tax rate from the current 21% to 15%, S&P 500 earnings will rise. On the other hand, increased tariffs on China and protectionist policies could hurt multinational companies with exposure to the US, potentially impacting the Dow Jones index.

Tariff changes could also lead to increased volatility among semiconductor, clean energy and automobile stocks. This means tech-heavy indices, like the Nasdaq 100, could be affected, as could the STOXX 50 index. Moreover, if trade tensions are reignited, earnings of European companies could come under pressure, which would affect the STOXX 50, FTSE 100 and other European indices.

For the time being, the combination of the AI-driven tech boom, the Fed’s easing cycle and the incoming pro-business administration could drive bullish sentiment.

Forex

Given that a second Trump presidency is expected to lead to higher growth and increased inflation for the US economy, the US dollar is likely to strengthen. Any pause in the Fed’s monetary easing could lend further support for the greenback. The USD would also be more attractive if trade tariffs are raised, while the EUR could see a sharp decline if the EU has to spend more on defense.

A stronger US dollar could drive carry trade volumes, especially with currencies like the Swiss franc and Japanese yen, which were heavily sold leading up to the election results. At the same time, the CHF is expected to find support, given Switzerland being shielded from tariffs due to its higher-value exports and the franc’s tendency to outperform when inflation is high.

On the other hand, the GBP could find support if stronger-than-expected economic growth in the UK, witnessed in the first half of 2024, continues into 2025.

Commodities

Trump’s disregard for the climate agenda and his support for oil and gas production could help sustain America’s position as the leading petroleum producer. However, it could weigh on WTI prices, which were already down almost 6% in the 12 months to November 7, 2024. On the other hand, Trump might ramp up oil sanctions on Iran, which could affect global crude supply.

A stronger dollar and bullish stock markets would weigh on gold prices. The safe haven asset tends to share a negative correlation with the USD, while also losing favour with investors during stock market rallies and periods of increased risk appetite. Gold futures dropped 3% to $2,673 per troy ounce following the announcement of the Trump win.

Investors need to keep an eye on policy-related developments in the US and its economic numbers before rebalancing portfolios to optimise on emerging market opportunities.

To Sum Up

• US and Asian stocks rallied while EU stocks declined following the US election results.
• The increased market volatility is likely to be temporary while the news is digested.
• Future market moves will depend on policy changes under the Trump administration.
• Technology, banking, defense and oil and gas stocks are likely to benefit from tax cuts, as is the S&P 500.
• EU stocks with exposure to increased tariffs by the US could suffer.
• The US dollar is likely to strengthen, while the euro could take a hit. The CHF could find support.
• Crude oil prices could decline if US oil production remains high.
• Gold prices could decline due to a strong dollar and bullish stock markets.

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