Although not yet fully certified, Trump has secured a clearer victory than initial polls indicated. The election resulted in a ‘Red sweep’, with a Republican majority in both chambers of Congress. This outcome suggests a heightened risk of tariffs, particularly targeting emerging markets, together with the prospects of stronger US fiscal spending, tax cuts and accelerated economic growth. We do not currently have any tactical positions in emerging market assets, either in equities or fixed income, while we await further insight into US trade policies and potential new tariffs. Europe could also face potential repercussions, including tariffs on imports, such as cars and industrial goods. As such, we continue to hold the ‘insurance instrument’ for European equities (in portfolios where client knowledge and experience, and regulations, permit), which gains value during equity market downturns.
Markets swiftly reacted to Trump’s victory, with US equities hitting new all-time highs amid expectations of higher growth and fiscal stimulus. The banking sector, in particular, saw a strong rally, driven by rising bond yields and optimism surrounding potential deregulation. In contrast, European and Asian stock markets were flat to negative. The US dollar strengthened, fuelled by growth optimism, while Treasury yields surged due to expectations of larger deficits under Trump. The 10-year yield closed the week at around 4.3%. Conversely, European yields remained relatively stable, with the 10-year Bund ending the week at 2.3%.
Earlier this year, we bought an ‘insurance instrument’ (again, in portfolios where client knowledge and experience, and regulations, permit), which appreciates when US equities fall below a certain level. The idea behind this was that, with such uncertainty in markets, we wanted to have some protection in portfolios in case markets dropped significantly. This instrument expires in the second half of December, but we’ve decided to sell it now.
We think Trump’s starker-than-expected election win is positive for US equities in the near term as his proposed tax cuts, fiscal spending, and a degree of deregulation could lead to stronger economic growth. Since we expect US equities to perform positively in the near term, there is a risk that the instrument would expire before markets fell enough for it to activate, rendering it worthless. In a sense, rising markets are the best outcome. The positive market performance outweighs the cost of the insurance. After all, you usually buy insurance hoping you don’t need to use it.
Following its initial 50 basis point cut in September, the US Federal Reserve (Fed) lowered its key rate by another 25 basis points last week. Fed Chair Powell emphasised the importance of avoiding further weakening in the labour market and reiterated his commitment to achieving a sustainable decline in US inflation to 2%. Consequently, the Fed is likely to continue cutting rates over its next few meetings. Powell indicated that fiscal policy changes under the incoming Trump administration would not influence the Fed’s short-term decisions. He also refrained from commenting on political matters, including concerns about the Fed’s independence given Trump’s victory. This week’s focus will be on US inflation data (Wednesday), which consensus expects to show a slight uptick.
Similarly, the Bank of England announced a widely anticipated 25 basis point rate cut to 4.75%. However, it also raised its inflation forecasts for 2025 and 2026 by 0.5 and 0.6 percentage points, respectively, reflecting fiscal expansion measures outlined in the UK’s autumn budget. We expect further rate cuts in the coming months, like with the Fed.
Elsewhere, markets will probably continue to focus on any statement by Trump and potential White House appointees, along with any hint on tax and regulation cuts, and whether extra tariffs will come (and towards whom). Investors might continue to keep an eye on the German political situation following the collapse of the ruling three-party coalition.
