As the world waits to see what happens in the United States when President-elect Trump takes office in January, it is worth keeping in mind that the administration will inherit a very different American economy than its last mandate.
Takeaways
- As the world waits to see what happens in the United States when President-elect Trump takes office in January, it is worth keeping in mind that the administration will inherit a very different American economy than its last mandate. Unemployment is low and persistent inflation is a bigger problem than deflation
- Economic growth is losing momentum and global trade remains relatively weak. With debt significantly higher and the savings rate lower, there appears to be little room for significant tax cuts. Additionally, valuations appear excessive in both equity and credit markets, but we believe continued strong demand for risky assets will support these valuations.
- Implementing the policy may prove much more difficult than discussing it, potentially exposing the world to greater residue risks
US
In the United States, business credit increased after the highly anticipated presidential election. The weakness observed in October was reversed in November; spreads have narrowed and rates have fallen. US high yield benefited from risk sentiment, with performance driven by lower rated securities. U.S. Treasury yields have fallen more in the long term than in the short term, a trend typically seen when markets believe the central bank’s short-term rate cuts are already fully priced in. Although markets still expect the Federal Reserve to cut rates, expectations appear to have been revised significantly upward to a neutral rate, taking into account the new administration’s policy agenda. Ahead of the Federal Open Market Committee meeting in mid-December, investors will closely monitor employment and inflation numbers, while trying to assess potential future rate cuts.
Europe
In Europe, credit markets recorded positive returns in November. Following the US elections and the new administration’s likely focus on pro-growth policies, fiscal expansion and trade protection measures, risk appetite has diverged between the US and Europe. Spreads have tightened significantly in the United States, particularly for high-yield bonds, while they have widened in Europe. We also saw divergences in the rates market, the German 10-year yield fell by around 30 basis points as the market expected further rate cuts from the European Central Bank in response to the weakening economic outlook. In the United States, Treasury yields fell by much less. Political uncertainty in Europe has weighed on investor confidence with the German government coalition collapsing in early November and with investors anticipating a vote of no confidence in France in December. Third-quarter results, most of which were released in November, also showed significantly weaker results in Europe (particularly in the underperforming auto sector) than in the United States. Credit markets continue to function well with open primary markets and inflows into the asset class. However, we see that investor caution (potentially exacerbated by the time of year) has increased in Europe, with investors becoming more selective.
EM
Emerging market debt rose as spreads narrowed, fueled by positive sentiment following the US presidential election. Government bond yields have fallen globally, creating a favorable environment for emerging market assets as investors seek higher yields amid falling rates. This month, sovereign debt outperformed corporate credit, benefiting from a so-called barbell structure including investment-grade, long-duration bonds and short-term debt from distressed companies that have thrived in favorable market conditions. In the corporate sector, lower-rated bonds – particularly Ukrainian Eastern European securities – led performance. At the sector level, the telecommunications sector in Latin America recorded notable outperformance. Among quality EM debt securities, single A rated bonds outperformed, mainly due to their longer duration which benefited from the falling yield environment.
Outlook
As the world waits to hear what will happen in the United States when President-elect Trump takes office in January, it is worth noting that the administration will inherit a very different American economy than its predecessor. predecessor. Unemployment is low and persistent inflation is more of a concern than deflation. Economic growth is losing steam and global trade activity remains relatively weak. With debt levels significantly higher and savings rates lower, there appears to be little room for significant tax cuts. Additionally, valuations in equity and credit markets appear stretched, but we expect strong demand for risky assets to support these valuations. It is possible that implementing the policy will prove much more difficult than expected, which could expose the world to greater risks.
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