After a four-year hiatus, Trump makes a strong return to the US political scene. Looking ahead, how will Trump's 2.0 policy affect the global capital markets?

On November 22, Bank of America Merrill Lynch global economist Claudio Irigoyen released the latest research reports, stating that Trump's economic policies mainly involve trade, immigration, fiscal policy, and deregulation. Due to the relative scale and order of these policies still being uncertain, the impact on economic growth, inflation, and mmf is also unclear.

Based on this, the report hypothesizes three types of scenarios that could be triggered by Trump's 2.0 in the coming years.

Scenario 1 (The Good): Deregulation and balanced fiscal policy, slightly strong dollar, relatively low gold price.

In the best-case scenario, Trump's 2.0 will focus on a growth agenda, including: deregulating policies, actively reducing taxes while decreasing fiscal expenditures to ensure budget balance, and downplaying tariffs and immigration restrictions that are not conducive to economic growth.

From an industry perspective, the report states that easing regulations on the banking industry will help relieve crediting constraints and promote stability across the financial system (especially for private lending), while easing regulations in the nengyuanhangye may place downward pressure on energy, particularly oil prices, helping to reduce the trade deficit.

In terms of trade, Trump 2.0's tariff and immigration restriction policies may be relatively moderate, bullish for emerging economies, or push global economic growth rate to exceed 3.7%.

The report indicates that under these circumstances, global real interest rates and inflation expectations will rise, the dollar may appear slightly strong, and gold prices are relatively low. It is expected that the economic growth rate in the usa will exceed 3%, and the Federal Reserve may continue to remain "on hold" or even raise interest rates.

The report also adds that the fluctuations of the dollar may not show a clear trend, as it is influenced not only by american policies; the trajectory of inflation mainly depends on how expansionary fiscal policy is implemented.

Scenario 2 (The Bad): Significant tariff increases exacerbate recession risks, leading the world into a risk-averse situation.

In a worse scenario, the Trump 2.0 deregulation agenda is stalled, with minimal fiscal easing and a very limited tax reduction agenda implemented. Due to concerns about government debt, the market may begin to price in higher interest rate levels.

The report states that in terms of trade policy, the usa government will advance aggressive tariff policies, significantly raising tariff rates and tightening immigration policies, accelerating the outflow of immigrant labor.

Bank of America believes that aggressive tariff policies will hit global trade, increase uncertainty, lead to a collapse in global investment, a decline in consumer confidence, and a significant drop in stock prices, ultimately causing the usa economy to fall into trouble and recession.

The report indicates that under these circumstances, although tariffs rising will temporarily push up inflation, the Federal Reserve will still sharply cut interest rates out of concern for economic growth, resulting in low real interest rates across various industries after excluding inflation.

Bank of America expects that under this global risk-averse scenario, long-term inflation expectations will also decline; the dollar's trend is uncertain and may weaken with the Federal Reserve's easing of monetary policy, also influenced by subsequent fiscal and monetary policies of other countries.

Scenario 3 (The Ugly): The usa falls into stagflation, the dollar weakens comprehensively, which is bullish for gold and cryptos.

In a scenario where tail risks accumulate, almost all conditions enter a 'worst-case' state, with geopolitical situations escalating extremely, and the usa's economy is likely to fall into stagflation.

Moreover, considering that the usa government may not be able to finance its deficit at reasonable interest rates, the Federal Reserve might be forced to implement yield curve control, which amounts to the monetization of the fiscal deficit, severely damaging the Federal Reserve's reputation.

The report added that in such a scenario, due to extremely tight financial conditions, real interest rates remain very low, but long-term inflation and its expectations will rise significantly, leading to a comprehensive weakening of the dollar's status as a reserve currency after being questioned, with gold and cryptos becoming the main beneficiaries.

This is also an extremely unfavorable scenario for the global economy, which could lead to a global economic recession and further complexities in geopolitics.

Editor/Jeffy