What does Trump’s victory mean for markets?

Donald Trump’s sweeping victory in US presidential elections may have surprised some, but the reaction of global markets to his triumph was pretty much in line with expectations. US stocks, the US dollar and bitcoin all rallied, while US Treasuries sold off in anticipation of lower taxes, deregulation and higher inflation.

The moves were an extension of the price action seen in the days and weeks leading up to the election, as investors had already largely positioned for a Republican presidency. The rallies in riskier assets also reflect some relief that the worst case scenario – a contested election – has been avoided. 

For what might lie ahead, our analysis of past US elections shows that the impact on asset prices usually starts to fade after a couple of months. Over the long term, economic fundamentals rather than politics tend to determine market direction. In this regard, we still see the US economy on a path to a soft landing.

However, there are some areas where Trump’s policies will likely have a longer lasting effect. His plans to increase tariffs on imports from China and elsewhere would result in a meaningful but not extreme hit on US earnings of about 7 per cent, some of which would be offset by potential tax cuts. The impact would not be uniform across sectors and on our calculations would be double that for consumer discretionary, staples and industrials.

Tariffs and trade friction do not bode well for emerging markets, but ultimately a non-recessionary easing cycle remains an attractive macro backdrop for them. Additionaly, we believe that China will redouble its efforts to boost the economy with fiscal stimulus as an insurance policy against any new US trade barriers.

The extent of Trump’s impact on markets also depends on whether Republicans manage to secure control of Congress.