Last week, we haven’t seen any major data from the US or Europe while markets are still digesting news related to policy announcements of the new President-elect Donald Trump and members of his administration. How are all these factors impacting the market?
President-elect Donald Trump remains the key figure in geopolitical and financial discourse in the US. The most recent topic concerns imposing tariffs on all products imported from America’s three largest trading partners. Trump promised to sign an executive order on January 20th, 2025, to charge Mexico and Canada a 25% tariff on all products entering the US, including a 10% tariff on goods coming from China. This is much more moderate than what was being discussed earlier in the campaign. To remind you, the initial intent was to impose 60% tariffs on China on all goods imported into the US, while instituting a 10-20% tariff on all imports, also reciprocating tariffs to match those on US exports. One of Trump’s policies includes taxes, with the top priority being extending individual income tax and estate tax provisions of the 2017 TCJA, almost all of which expire at the end of 2025. However, corporate taxes are to follow, with the promise to reduce corporate income tax to 15% from 21%, although it is yet to be seen whether this would be a reduction in the statutory rate or a targeted rate for manufacturers.
To implement all the tariffs and execute policies without distorting the markets, the President-elect would need the help of his administration, with one of the most vital roles being that of a Treasury Secretary. Trump announced he will nominate Scott Bessent, pro-tariff Wall Street veteran, and hedge fund mogul for the role. As soon as it hit the market, the news fuelled a rally in currencies around the world, as the markets feared Trump would send tremors throughout global markets. The market views Bessent as someone with a more phased approach to imposing tariffs and attempting to rein in the budget deficit and consensus thinking is that he will be positive overall for the economy and markets.
As the next meeting of the Fed and ECB approach, we are starting to see a divergence in monetary policy between these two economies. For the last three years, we have seen inflation and monetary policy move in a synchronized way across the world. However, the loosening cycle of the Fed is taking a different shape than that of the ECB, as the Fed’s main concern is mounting inflation risks while the ECB is forcefully addressing the question of economic weakness. The Fed is on course to cut its benchmark rates by only half as much by the end of 2025 as the ECB with inflation forecasted to stay above 2%, compared to the ECB which is facing slow growth and inflation projection undershooting 2% target as soon as February.
To conclude, the global financial markets are absorbing Trump’s trade policies, monetary policy divergences, and potential fiscal changes, all while navigating the uncertain geopolitical environment. Since the election day, fear was present that the yields in the US are going to skyrocket although that turned out not to be the case. As a matter of fact, yields moved lower, and the curve has flattened suggesting that investors are cautious about future interest rate cuts due to sticky inflation and strong GDP growth, which implicates the continued risk of the Fed being unable to cut as much as the market had anticipated.
US 2-year and 10-year Treasury bond yield
Source: Bloomberg, InterCapital
