Source: Finance Association

Trump's unexpected victory in the 2016 presidential election brought a deep “Trump shock” to financial markets. Now, many Wall Streeters have already begun making more thorough preparations for the possibility of winning another general election.

Compared to eight years ago, Trump now seems likely to win nominations from within the party at a faster rate, when he did not lock in nominations until May. On Sunday, Florida Governor Ron DeSantis announced his withdrawal from the 2024 US presidential election and indicated that he would support Trump in his presidential campaign instead. Currently, Trump's only remaining powerful rival in the party's primary election is Haley, the former US Permanent Representative to the United Nations, and Trump's approval rating is far ahead.

The polls also showed that the “ultimate confrontation” between Trump and current US President Joe Biden is likely to be intense. This is significantly different from his “slim” hopes of winning in the pre-2016 election polls.

Daniel Tobon, head of G10 foreign exchange strategy at Citigroup's Global Marketing Department, said, “This time, the market will fully consider the two possibilities of winning and losing, and price them to a certain extent — we don't expect high volatility like after the 2016 election.”

Of course, nothing is foolproof, and Trump's election prospects are still likely to be upended by ongoing criminal cases against him or unexpected turns in voting. At least for the market, this has made the election factor so far just background noise — people's current focus is still mainly on the economic development trajectory, geopolitical tension, and when the Federal Reserve will start cutting interest rates.

But some early consensus is being formed, based in part on what happened after Trump's last victory, and the likely impact of several policies he has determined so far — such as imposing a 10% tariff on all imported goods and making personal tax cuts permanent in 2017. As a result, this could put upward pressure on bond yields, support the US dollar, and drag down trading partners' currencies...

Below, let's review in detail how the market reacted to Trump's victory in 2016, and what impact will it have on the equity and bond exchange market if he wins again this year?

bond market

The current situation facing the US bond market is actually quite different from 2016, when the Federal Reserve had just completed its first rate hike during its austerity cycle and was preparing to continue raising interest rates. Expectations of these rate hikes — combined with the belief that Trump's tax cuts will stimulate the economy, have led to a sharp decline in the US bond market, driving the 10-year US bond yield to the biggest increase in more than seven years in the fourth quarter of 2016. Bond funds, on the other hand, experienced the largest cash outflow since downsizing in 2013.

The question now is, to what extent will Trump's proposed policies, as a Republican nominee or new president to take office, change the current expectations of interest rate cuts that have been fully priced by the market?

Gennadiy Goldberg, head of US interest rate strategy at TD Securities, said, “This is related to the impact of taxes and economic growth, the impact of deficits, and the impact of regulation, because this is critical to the market.”

Of course, the impact of this year's election on US fiscal policy may be viewed as more moderate, in part because one of the main focuses will now be on whether the tax cuts introduced by Trump in 2017 will be extended when they expire next year, rather than whether to introduce further new tax cuts. Furthermore, Biden has also been implementing his expansionary fiscal policy, which has caused the government to face a huge deficit when it is close to full employment.

“Which of these candidates is likely to have a higher deficit? “Judging from the current situation, it's all possible,” Goldberg said. “This largely depends on America's fiscal trajectory, and there is currently no power to drive fiscal conservatism. This makes investors nervous about 2025 and 2026.”

Whether the next president's party controls Congress is also critical, as a split government could lead to an impasse.

Goldman Sachs Group's Dominic Wilson and Vickie Chang said in a note to clients that the Republican Party is more likely to win control of the White House and Congress. They pointed out that this overall victory situation may lead to an increase in bond yields, especially those on longer-term bonds, because the Federal Reserve must always be wary that the economy may overheat.

Foreign exchange market

A rise in US bond yields could clearly be beneficial to the dollar. Due to expectations of interest rate cuts, US bond yields have now fallen sharply from their high in October last year, and the US dollar has also declined, far below the 2022 high.

During Trump's last term in office, although the US dollar soared after Trump's victory in 2016 due to a jump in treasury yields, in 2017, as the US economy lost momentum and the growth rate of the European economy rebounded, the dollar weakened again.

But this time around, we need to be careful — if Trump's slogan of imposing tariffs succeeds, it may boost the dollar's exchange rate against other currencies by curbing imports and blocking the flow of dollars out of the US.

Alan Ruskin, strategist at Deutsche Bank, said, “The reason the 'Trump effect' is to some extent implied to be beneficial to the US dollar is precisely because it is negative for non-US currencies such as the euro, the yuan, and the Mexican peso. Traders are aware that, for different reasons, Trump's influence on trade and geopolitics will benefit the dollar, at least initially.”

The Mexican peso, which surged last year, plummeted about 2% last Tuesday as investors digested news of Trump's victory in Iowa. As the election approaches, if Trump is likely to win, it is expected that other non-US currencies such as the Euro and RMB will also face greater pressure.

Deutsche Bank strategists wrote in a note to clients that even if the Federal Reserve cuts interest rates sharply as expected, election factors may keep the dollar within the 2023 trading range this year. They wrote that as election risks increase, the market may start increasing the dollar's safe-haven premium this year.

stock market

Last Friday, the S&P 500 reached a new record high after a lapse of almost two years. Currently, the industry generally believes that whether the US stock market can rebound further will depend more on whether the Federal Reserve can start cutting interest rates as soon as possible and pull the economy into a soft landing path rather than a recession.

Looking back at the beginning of 2016, the foundations of global stock markets are arguably more unstable than they are now — facing the specter of rising interest rates and an oversupply of global oil. In 2015, the devaluation of emerging market currencies such as the RMB was impressive. In mid-2016, the Brexit referendum had another impact. Even so, the S&P 500 remained on an upward trend for most of that year, and continued to rise sharply for two months after Trump won the election.

Under Trump's campaign slogan, some industries performed better than others. His “America First” remarks and promises to strengthen US defense spending caused the stock prices of defense contractors such as Lockheed Martin and Northrop Grumman to rise rapidly. Although Trump ultimately failed to fully deliver on his promise to develop large-scale infrastructure plans, Caterpillar has more than doubled during his tenure.

Overall, however, those so-called “Trump deals” in 2016 will actually lag behind the S&P 500 market performance during their tenure. This has left investors wary of trying to predict stock market winners and losers at this stage, particularly in a context where macroeconomic forces are overwhelming election rhetoric.

Joseph Saluzzi, co-head of stock trading at Themis Trading LLC, said, “The current political predictions and market trends don't seem to match. At this point in the economic cycle, it is impossible to say that market reactions will be based solely on political predictions.”

“If you bet on coal stocks, finance stocks, infrastructure stocks — the market will find ways to make you look like an idiot,” Saluzzi said.

Editor/jayden