The Trump 2.0 scenario becomes more complex: The initial market perception of Trump’s second term as pro-growth and inflationary is under reconsideration. As markets delve into the transformation of the political landscape, it becomes clear that the economic trajectory is more complex than initially anticipated.
Tariffs first, then tax cuts: Trump’s recent cabinet nominations, which include key representatives of a hawkish approach to China, signal a greater focus on trade and tariffs rather than tax reforms. Tax cuts are likely being prepared, but will require approval from Congress and are associated with fiscal constraints, making them currently a secondary priority.
Tariffs are negative for risk-taking: The emphasis on tariffs introduces uncertainty and volatility in the market, particularly in sectors heavily reliant on global supply chains. High-beta stocks, including small cap companies and cyclical sectors, are particularly exposed to trade disruptions. Global markets, notably China/Hong Kong, will feel significant effects as trade tensions increase. This creates a risk of a downturn for stocks, especially those linked to international trade.
USD as a safe currency: Faced with downward pressure on currencies such as CNH and EUR, due to increasing trade tensions, the US dollar gains value as a safe haven.
As Trump’s policy takes shape, one thing is clear: tariffs are becoming a priority, signaling a potential escalation of trade tensions even before the introduction of tax cuts. This shift has far-reaching implications for equity, bond and currency markets.
How can investors tactically adjust their portfolios in response to Trump’s new strategy? Firstly, the complex effects, likely to have the most significant impact on various asset classes, need to be understood.
Tariffs: Inflationary but negative for growth: Trade war scenarios usually increase market volatility as the trade agenda tightens, which can severely affect sectors and regions most at risk from tariffs.
Market implications:
Equities: A focus on tariffs is generally negative for risk taking and affects growth, corporate profits, and especially sectors dependent on global supply chains.
US Stocks: High-beta sectors and small cap companies (e.g., Russell 2000) are particularly exposed, as supply chain disruptions hit them harder. Defensive sectors like consumer goods, healthcare, utilities, and selected retail companies with less exposure to overseas production may be comparatively more resilient.
International markets: Significant effects are expected for stocks in China/Hong Kong due to direct trade exposure, and also weaker market conditions in Asia and other countries or regions that are intermediaries to China, such as Europe and Australia.
Bonds: Although tariffs can exert some inflationary pressure, their impact on growth may offset this, supporting bonds under a possible flattening of the yield curve.
Currencies: The US dollar could gain as a safe haven, while high-beta and cyclical currencies such as EUR, CNH, AUD, and MXN may weaken under trade pressure.
Tax cuts: Pro-growth and inflationary: Once introduced, tax cuts can boost domestic economic growth and benefit sectors focused on the United States at the expense of those more reliant on global markets. Likely beneficiaries are small cap companies and cyclical businesses, which may benefit from reduced tax burdens.
Market implications:
Equities: Stocks of small cap companies (like those in the Russell 2000) and cyclical sectors may benefit from tax cuts, but this gain may be limited by broader trade and fiscal risk exposure.
Bonds: While tax cuts can elevate yields, growth uncertainties in the context of tariffs may counteract this effect.
Currencies: Economic growth driven by tax cuts would support the US dollar, especially when other economies are grappling with a slowdown related to trade factors.
Deregulation: Fewer macroeconomic effects, more sectoral: The Trump administration is also signaling a renewed focus on liberalizing regulations, which could act as a pro-business catalyst in different sectors. This is expected to simplify operations in industries such as energy, finance, and manufacturing, reducing costs and potentially boosting domestic growth. Although deregulation generally supports the business environment, its effects are complex across different asset classes, notably considering ongoing tariff pressures.
Market implications:
Equities: Deregulation positively impacts US stocks, particularly in sectors like energy, financial services, and manufacturing, where regulations have historically been costly. Simplification of regulations in these sectors can lead to greater operational efficiency and improved corporate profitability.
Energy: Oil and gas companies may benefit from environmental deregulation, while the renewable energy sector may suffer if tax breaks for clean energy are abolished.
Finance: Banks and financial services may gain greater flexibility in lending, capital requirements, and investment operations, which could enhance their financial performance.
Bonds: Economic growth resulting from deregulation may exert moderate pressure on bond yields if it leads to higher corporate profits and increased economic output.
Currencies: The narrative of growth driven by deregulation strengthens the positive tilt towards the US dollar in the medium term at a lower probability of Fed rate cuts.
Tariff policy becomes urgent: Tax policy often requires more time to shape as it requires approval by Congress. There is a likelihood that some members may be concerned with record debt and deficits. As a result, changes in tax policy that ultimately get implemented may be narrower in scope than those promised in the campaign. However, US trade and tariff policy can often be shaped, and sometimes directly implemented via presidential executive orders. With cabinet nominations like Marco Rubio and Mike Waltz, which signal a tough stance against China, tariffs appear to be an immediate target of the Trump administration.
In conclusion, investors should approach the equity market cautiously as tariff headlines are likely to be negative for short-term risk-taking, which could outweigh the positive impact of tax cuts. Nevertheless, regardless of the outcomes on this front, the US dollar stands a chance to benefit from multiple supportive factors, including Trump’s customs policy, fiscal policy, Fed actions, and geopolitical risks. This dynamic explains the continuing strength of the US dollar, even when US stocks struggle to reach new highs. The resilience of the dollar is expected to persist, making it a key beneficiary of the current macroeconomic environment.
Commentary by Charu Chanana, Chief Investment Strategist at Saxo.
Source: https://managerplus.pl/scenariusz-trump-2-0-staje-sie-bardziej-zlozony-najpierw-cla-pozniej-obnizki-podatkow-52129
