Insights

The Trump 2.0 Era and Its Impact on Global Markets

Macro Events

As we enter February 2025, the global macroeconomic outlook is characterized by persistent geopolitical uncertainties and strong economic activity.

In the United States, economic activity is likely to continue its trend in 2024 and is likely to remain strong in the coming months of 2025. The US labor market remains resilient, and consumer sentiment remains strong [1]. However, with the inauguration of Trump in January, the market has focused primarily on Trump’s pro-growth tax policy and deregulation efforts. Trump’s pro-growth agenda, which emphasizes corporate tax reductions, deregulation, and infrastructure investment, has rekindled market optimism. His administration has swiftly implemented executive orders aimed at streamlining regulatory processes in sectors such as energy, finance, and healthcare. These measures, coupled with fiscal policies favoring domestic manufacturing and investment, are expected to further stimulate economic activity. Together with the increased yield advantage of US bonds over the rest of the world, this has also boosted the US dollar

On the other hand, China’s economy is also showing signs of stabilization as demand from other emerging markets remains strong despite tariff threats from US and the government’s policy measures are beginning to take hold [2]. Subsidies for electric vehicles and household appliances have boosted consumption.

Moving to Europe, economic growth has been sluggish and continues to show signs of weakness. The manufacturing sector remains fragile, heightening the risk of rising unemployment in 2025 [3]. Additionally, ongoing challenges in forming a new French government are expected to hinder meaningful progress in addressing the country’s debt sustainability issues [4].

In late January, DeepSeek, a Chinese artificial intelligence (AI) startup, was introduced into the market and gained global attention for its rapid progress in AI technology by developing AI models that match the performance of leading U.S. firms but at a much lower cost. By showing that high-performance AI models can be created with fewer resources, it challenges the capital-intensive strategies used by established players. This impact was immediately felt in financial markets, as NVIDIA’s stock plummeted by 17%, contributing to over $1 trillion in market capitalization losses across U.S. equities. Despite the short-term market turbulence, DeepSeek’s innovation could drive long-term macroeconomic benefits by increasing competition in AI development, lowering costs, and accelerating the expansion of AI-driven platforms and applications.

Equities

The U.S. equities market experienced a downturn, particularly within the technology sector, following the release of robust employment data. In December 2024, the U.S. economy added 256,000 jobs, significantly surpassing the anticipated 160,000. This unexpected growth has led investors to reassess their expectations regarding future interest rate cuts by the Federal Reserve [6]. The Magnificent 7 suffered drops, where Nvidia dropped 2% and Apple and Meta declining about 1% [7].

While mega-cap stocks, particularly the Magnificent 7, have driven much of the market’s growth, expanding focus beyond these giants could unlock better returns due to more attractive valuations and improving fundamentals. Stocks outside the mega-cap group generally trade at lower valuation multiples, offering better entry point for investors. Recent earnings forecasts for companies beyond the Magnificent 7 have been revised upward, signalling improving business conditions [8].

Under the Trump administration, the potential for renewed tax cuts, deregulations, and tariffs is a double-edged sword. Deregulation and a lower corporate tax rate could accelerate domestic growth, particularly for US manufacturers and industrials, while broader trade tariffs pose risk to inflation and global trade.

Fixed Income

Yields on the 10-year U.S. Treasuries are over 100 basis points higher than their September lows – while the Federal Reserve has been lowering its target policy rate. Market participants are closely monitoring the Federal Reserve’s monetary policy decisions, especially regarding interest rate adjustments and quantitative tightening measures. Additionally, the fiscal policies of the current administration, including potential tariff implementations, are contributing to market volatility and impacting Treasury yields. Given these dynamics, the 10-year Treasury yield is expected to remain sensitive to economic data releases and policy developments in the near term.

Investment-grade (“IG”) bonds may still stand out as the preferred option, offering attractive yields relative to government bonds. These bonds may also offer the safety and stability of high credit quality, making them particularly appealing in an uncertain environment.

FX

In January 2025, we saw that the U.S. Dollar Index (DXY), which measures the dollar against a basket of major currencies, experienced a slight decline of approximately 0.9% over the month. It began at 108.46 points and concluded at 107.45 points. However, as the ‘Trump 2.0’ era begins, the dollar index is some 20% higher than its average over the past quarter of a century. Currency speculators exhibited strong bullish sentiment towards the dollar, marking the most optimistic stance since 2016 [10].

However, the dollar might be mighty, but it may also be getting ahead of itself. It is possible that most of the economic fundamentals and dynamics that have strengthened the dollar recently are fully priced into the dollar’s exchange rate or even over-priced in some cases.

In Europe, the EUR/USD declined for the third consecutive month in December, dropping 1.5% to around 1.04, marking its lowest level in two years. This weakness reflects the stark monetary policy divergence between the Federal Reserve and the European Central Bank (ECB). Market expectations for Fed rate cuts have diminished due to inflationary pressures from Trump’s tariff policies, while interest rate swaps suggest the ECB may adopt more aggressive easing measures to support the region’s economy [11].

A 25-basis-point rate cut is fully anticipated at the ECB’s upcoming meeting later in January, whereas the Fed is expected to hold rates steady [12]. Additionally, political turmoil in Germany and France, coupled with a manufacturing slowdown in the Eurozone’s largest economies, is expected to further weigh on the euro.

Meanwhile, in the safe-haven space, although the Swiss franc is expected to be favoured over the Japanese yen due to its stability, the Swiss National Bank seems likely to cut rates further. As the economy falters with threats, they may reintroduce negative interest rates if necessary [13]. Based on this, we believe that the Swiss franc remains to be a strong candidate for a carried currency play, given its stability and appeal in a low-risk context.

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Source:

[1] The final jobs report for 2024 lands Friday. Here’s what 2025 could mean for your job
[2] US tariffs on China unable to stop China trade growth – Opinion – Chinadaily.com.cn|
[3] European Economics Analyst Euro Area Outlook 2025 Under Pressure
[4] Moody’s downgrades 7 French banks as the country’s debt and political chaos looks set to spill into 2025
[5] Morgan Stanley Research dated 28 January 2025
[6] Wall Street stocks waver after robust US data puts brake on bets on interest rate cuts
[7] Why Tech Stocks Dropped Monday
[8] Global Equity Views 4Q 2024 | J.P. Morgan Asset Management
[9] Eight reasons to like investment grade bonds in 2025 | abrdn
[10] Funds start Trump 2.0 era most bullish on dollar since 2016 | Reuters
[11] How Many Times Will the ECB Cut Interest Rates in 2025? | Morningstar
[12] Big banks expect a quarter-point cut for ECB’s first meeting of 2025 | Reuters
[13] Swiss National Bank chief flags negative rates, weakens Swiss franc | Reuters