As Donald Trump prepares for a potential return to the White House, the US dollar and the stock market are expected to benefit, while the bond market and sectors such as emerging markets, clean energy and sustainable investing could face challenges.
Investors predict that Trump’s policies will likely lead to higher inflation and growth, forcing the Federal Reserve to keep interest rates high to prevent the economy from overheating. This scenario should strengthen the US dollar.
Citi analysts predict a 3% rise in the dollar after Trump’s victory. The euro could see a significant decline, potentially falling below $1, particularly if Trump’s proposed tariffs and domestic tax cuts are implemented.
The Chinese yuan is also expected to depreciate, recalling its rapid decline during the 2018-2020 period. Anticipation of higher dollar returns has set the stage for a return of carry trades, with the Japanese yen and Swiss franc already under selling pressure ahead of the election. However, the Swiss franc may find some support due to Switzerland’s high-value exports and its historical performance during periods of high inflation.
In the crypto space, bitcoin could see gains under a Trump administration, which is expected to take a softer stance on regulation. Cryptocurrency hit a new all-time high today.
In the stock market, Trump’s promises of deregulation, corporate tax cuts, increased oil production and strict immigration policies are likely to boost sectors such as banking, technology , defense and fossil fuels. Goldman Sachs estimates that Trump’s plan to cut the corporate tax rate from 21% to 15% could increase earnings by about 4%.
However, the extent to which Trump’s tax cut plan will succeed in Congress remains unclear. Its protectionist stance and tough approach towards China could increase costs for multinational companies, negatively impacting their profitability.
European profits could see “high single digit” percentage declines if trade disputes resume, Barclays (LON:BARC) warns. Europe’s defense sector could have a mixed outcome, with Trump pledging to end the war in Ukraine but also demanding higher defense spending from European allies.
Regarding bonds, growing concerns over US government debt levels and budget deficits have led to fears of rising borrowing costs. Trump’s spending plans, which could add about $7.5 trillion to deficits over ten years, have already pushed Treasury yields up nearly 50 basis points in October. Inflationary pressures from his policies would limit the Federal Reserve’s ability to cut rates, keeping Treasury yields high.
Commodities could also be affected, with Trump’s goal of maximizing U.S. oil and gas drilling likely keeping West Texas Intermediate futures prices low. However, its plans to apply oil sanctions to Iran and fill the Strategic Oil Reserve could support prices. The soybean market is already feeling the impact, with prices down 25% from last year due to concerns over trade tensions with China.
Emerging markets are bracing for potential headwinds, including possible tariffs on Mexican vehicle imports and a proposed tax on remittances from Trump’s vice presidential candidate JD Vance. The South African rand, Brazilian real and those countries’ stock markets could suffer if tariffs are increased. A sell-off in Treasuries and a stronger dollar could draw capital out of emerging markets and force tighter monetary policies.
In terms of sustainable investing, a Trump victory would allow him to roll back green regulations and could potentially impact stocks in the oil, gas and coal sectors. He also threatened to cut funds from the Inflation Reduction Act, which could affect subsidies for electric vehicles and renewable energy.
However, any significant measures to depress stocks in these sectors could require congressional action, and some Republican lawmakers have shown support for parts of the climate law.
Trump’s promise to fire Gary Gensler as chairman of the U.S. Securities and Exchange Commission could also hamper the ability of U.S. sustainable funds to push for policy changes. These funds have already seen net withdrawals since last year due to high energy prices affecting their relative returns.
Reuters contributed to this article.
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