Navigating Economic Crosswinds Amid Trump's Influence

16/12/202416/12/2024InsightsJoy

Navigating Economic Crosswinds Amid Trump’s Influence

Macro Events

Donald Trump’s victory in the 2024 U.S. presidential election has triggered significant market reactions, driven by anticipated policy changes. Key campaign promises—including tax cuts, deregulation, energy independence, and a pro-crypto stance—are reshaping market dynamics across various sectors.

In the cryptocurrency space, Bitcoin has reached a historic all-time high of $88,448, fueled by rising institutional interest and supportive policies from the new administration. The alignment of pro-crypto positions from influential figures like Trump and Elon Musk has further bolstered confidence in the market [1]. Crypto mining stocks and blockchain-related equities have surged in tandem, reflecting bullish sentiment in the crypto market.

In parallel, The Federal Reserve recently reduced interest rates by 25 basis points, setting the federal funds target range to 4.5%-4.75% [2]. This decision aims to stimulate equity and bond markets while exerting downward pressure on the U.S. dollar. October inflation data reflects a continued moderation, with the Consumer Price Index (CPI) rising by 2.6% year-over-year [3].

Meanwhile, China’s economy has shown encouraging signs of stabilization and recovery, driven by a 4.8% year-over-year increase in retail sales—the strongest growth since February [4]. This rebound in consumer spending signals improving sentiment in a segment of the economy that has previously struggled to keep pace with production, which has benefited from Beijing’s longstanding manufacturing-focused policy support.

Gold has recently experienced a significant increase in value, driven by escalating geopolitical tensions, notably between Russia and Ukraine, and the Federal Reserve’s recent interest rate cuts. These developments have enhanced gold’s appeal as a safe-haven asset [5]. Given these factors, gold is expected to continue reaching new highs, serving as an effective hedge against both geopolitical risks and uncertainties related to sovereign debt and deficits. Analysts anticipate that gold prices could reach $3,000 per ounce by mid-2025, driven by ongoing geopolitical tensions and supportive monetary policies [6].

Equities

Following Donald Trump’s victory in the 2024 U.S. Presidential election, U.S. equities experienced a significant rally, driven by expectations of continued pro-business policies, including tax cuts, deregulation, and potential tariff adjustments. This optimism was reflected in substantial inflows into U.S. equity funds. In the week leading up to November 13, investors poured $37.37 billion into these funds, marking the largest weekly net purchase since January 2014 [7].

Markets reacted positively to the Republican-controlled government, with equities experiencing robust gains, particularly in sectors poised to benefit from pro-business policies such as energy, financial services, and pharmaceuticals. This rally was further fueled by optimism about accelerated economic growth and a potential broadening of corporate earnings.

Futures markets reflected this sentiment, with futures surging 146.28 points, or 2.53%, to close at 5,929.04, marking the largest single-day percentage gain since November 2022. This momentum underscores market confidence in the anticipated fiscal and regulatory policies of the Republican-led administration, which are expected to drive economic expansion and enhance sector-specific growth opportunities [8].

Bitcoin recently surged to all-time highs, rising over 33% since November 4, buoyed by President-elect Donald Trump’s pro-crypto stance. Key campaign pledges, such as creating a strategic Bitcoin reserve and fostering a pro-crypto Congress, have further fueled market enthusiasm for digital assets.

Despite the impressive gains, Bitcoin and other cryptocurrencies remain highly volatile, with limited real-world adoption. Bitcoin has historically shown a positive correlation with global equities but exhibits significantly higher volatility. Notably, cryptocurrency has faced major drawdowns exceeding 70% since 2014, often taking years to recover.

In contrast, the rally in equities has been supported by more robust fundamentals. Strong U.S. economic data, including solid non-manufacturing survey results and a 2.8% GDP growth rate in Q3, underscore the resilience of the U.S. economy [9]. The outlook for stocks is also supported by the prospect of further Federal Reserve easing [10]. Historically, such cuts in non-recessionary periods have been favorable for equities.

Moving to China, the CSI 300 Index has remained largely range-bound since its peak on October 8, reflecting mixed investor sentiment amid underwhelming fiscal stimulus measures and concerns over U.S. President-elect Donald Trump’s confrontational stance toward China. While Chinese equities have rallied nearly 25% since mid-September [11], the near-term outlook is tempered by uncertainties surrounding domestic policies, tariff-related volatility, and elevated U.S. inflation, which collectively pose downside risks.

Sectors dominated by domestically oriented, state-owned enterprises (SOEs)—including financials, utilities, energy, and telecommunications—are well-positioned to outperform in this environment as they are less exposed to external volatility and stand to benefit from potential increases in policy support.

Conversely, growth-oriented sectors, such as technology and consumer discretionary, remain more vulnerable to stimulus disappointments and uncertainty surrounding U.S. trade and economic policies.

Fixed Income

The 10-year U.S. Treasury yield rose by 12.4 basis points to close at a four-month high of 4.43%, nearing its all-time peak. This increase follows Federal Reserve Chair Jerome Powell’s indication that the central bank is not in a rush to lower rates. The yield surged 80.9 basis points from its 52-week low of 3.62% on September 16, reflecting the market’s adjustment to a higher-for-longer rate outlook [12]. We observed fixed income investors taking advantage of the current yield environment by locking in longer-duration bonds to mitigate reinvestment risks. The expectation of continued rate cuts through the end of 2025 may make fixed income an essential component of a balanced portfolio.

Moving to China, In China, investment-grade (IG) bonds issued by state-owned enterprises (SOEs) and financial institutions continue to offer compelling value. These issuers are relatively insulated from U.S. tariffs and external market fluctuations, making them attractive in the current economic environment. Despite their appeal, growing concerns about SOE debt sustainability and broader credit risks in China’s corporate bond market necessitate a cautious approach. Investors may focus on sectors explicitly supported by government policies while avoiding overexposure to riskier credits. Diversification and careful credit analysis may be crucial to navigating this complex landscape effectively.

FX

The second term of US President Donald Trump, along with the Republican Party’s control of Congress, has led to a significant strengthening of the US dollar. Expectations of pro-business policies, including tax cuts and deregulation, bolstered investor confidence, leading to a surge in the dollar’s value. The dollar index climbed 6.3% since late September [13], marking its seventh straight weekly gain. The U.S. dollar’s trajectory in the coming months may be influenced by ongoing fiscal policies, Federal Reserve actions, and global economic conditions which may affect the dollar’s future performance [14]. The Japanese yen experienced significant depreciation against the U.S. dollar following Trump’s election victory. The yen weakened past 155 per dollar, reaching its lowest point since July. This decline was primarily driven by expectations of Trump’s pro-business policies, including tax cuts and deregulation, which bolstered the dollar’s strength. In response to the yen’s rapid depreciation, Japanese authorities expressed concerns over potential market intervention. Finance Minister Katsunobu Kato warned of possible action if the yen’s decline became excessive, highlighting the government’s vigilance in monitoring currency movements. The Bank of Japan (BOJ) also faced increased pressure to address the yen’s weakness. Governor Kazuo Ueda indicated that the BOJ would consider raising interest rates if the economy aligned with forecasts, leaving the possibility of a December rate hike open which has given some support recently to JPY trading to 151 (28 Nov 24). With BOJ’s meeting in December, JPY may not weaken significantly unless BOJ disappoints.