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Trump’s Geopolitical Game: How Will It Impact Global Financial Markets?

POLITICSTrump's Geopolitical Game: How Will It Impact Global Financial Markets?

President-elect Donald Trump plans to implement a series of new initiatives and policies immediately upon taking office, potentially triggering significant volatility in financial markets as global investors react to anticipated changes. Key areas of focus include tax policy, deregulation, and fiscal policy. However, the full effects of these measures may only become evident by the fiscal year 2026.

Contradictions and Economic Challenges

The Trump administration aims to reindustrialize the U.S., reduce trade and budget deficits, and maintain low inflation. These objectives, while ambitious, may be difficult to reconcile. A proposed “3-3-3” plan by Secretary of the Treasury nominee Scott Bessent is designed to achieve these goals but raises concerns about fiscal tightening and other potential economic risks.

Geopolitical Dynamics

The U.S. Treasury bond market may face challenges from rising yields and the cost of servicing public debt. Global players, particularly China and Europe, will respond to U.S. policies, with attention centered on China’s economic adjustments and Europe’s capacity for reforms and investment growth.

Trump’s Second Term: An Unfolding Scenario

Donald J. Trump begins his term as president on January 20, promising a flurry of initiatives and policy announcements from day one. The first quarter of 2025 will see global markets reacting, with key tax, regulatory, and fiscal policies likely crystallizing only by 2026.

Markets are expected to speculate heavily on future developments, creating significant trading volatility. The world will grapple with stabilizing under the U.S.’s assertive policy shifts, which provoke varied domestic and international responses.

United States: Can Trump’s Strategy Lead the World?

Markets initially reacted positively to Trump’s decisive victory and the Republican takeover of Congress, echoing responses from the 2016 election. The U.S. dollar strengthened, Treasury yields spiked, and U.S. stocks gained. However, by year’s end, the S&P 500 index underperformed by approximately 2% compared to election day levels, partly due to policy uncertainties and the Federal Reserve’s hawkish stance during its December 18 meeting.

Stock Market Overview

Region Q4 2024 YTD 2024 5-Year Avg.
World -0.2% 18.7% 7.6%
U.S. 2.7% 24.6% 10.7%
Europe -9.7% 1.8% -2.7%
Emerging Markets -8.0% 7.5% -0.9%
Japan -3.6% 8.3% 3.9%

2024 was a notable year for global equities, with U.S. stocks—comprising 70% of the MSCI World Index—dominating. The index remains concentrated in U.S. mega-caps, with the top 20 companies representing 40% of its composition.

Trump’s Plan: Too Good to Be True?

Trump’s agenda prioritizes U.S. reindustrialization, job restoration in manufacturing, and improved supply chain security. The goals also include reducing trade and budget deficits, controlling debt growth, and maintaining low inflation—an ambitious balancing act.

Scott Bessent’s “3-3-3” plan outlines:

  1. Deficit reduction to 3% of GDP.
  2. Real GDP growth of 3% through deregulation and tax cuts.
  3. Inflation control via increased domestic oil and gas production.

Skepticism abounds. Fiscal tightening is expected to limit growth, while uncertainties around tariffs and geopolitical tensions could further hinder economic progress.

Bond Market Reality Check

Treasury yields have risen in anticipation of Trump’s policies, driven by expectations of persistent inflation, high deficits, and solid economic growth. However, the rapid increase in debt issuance and soaring costs of public debt servicing could test market resilience. In 2025, the U.S. is projected to spend $1 trillion on debt servicing, up from $900 billion in 2024.


Global Responses: Ripple Effects

China: G2 or G-Zero?

China’s response to U.S. policies remains uncertain, ranging from potential cooperation to increased geopolitical competition. Trump may begin with targeted tariffs, opening the door to negotiations.

Europe: A Turning Point

Europe faces critical economic challenges, with Germany poised for growth following elections in February 2025. However, structural reforms and investments are needed to revitalize the region’s economy.

Conclusion
Trump’s aggressive strategy promises dramatic shifts in U.S. and global markets. While his administration’s goals aim to strengthen the U.S. economy, contradictions in policy and geopolitical uncertainties present substantial risks. The global response will shape the trajectory of economic and market dynamics in the coming years.

Commentary by John J. Hardy, Chief Macro Strategist at Saxo

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