- Donald Trump looks increasingly likely to win the US Presidential election.
- As swing states have leant Republican it’s prompted gains for the US dollar.
- The yield 10-year US Treasuries surged to above 4.4%.
- Trump’s policies if he is installed in the White House are expected to be inflationary.
- Wall Street futures point to a higher open, with Tesla among the gainers.
Susannah Streeter, head of money and markets, Hargreaves Lansdown:
‘’With Donald Trump looking increasingly set for a triumphant return to the White House, the dollar has gained ground against a basket of currencies. Investors are bracing for tariffs and a clamp down on immigration, policies considered to be inflationary which are likely to mean interest rates may be more elevated in the years to come. Trump’s more renegade approach to trade is likely to push the US further away from global institutions and the rules-based order built up over many decades. But at the same time, expectations are high that a Trump presidency will mean fewer regulations on big tech and big finance. Although Kamala Harris could still pull off a win, her chances of victory have narrowed.
US futures point to a positive surge on Wall Street, with Tesla among the early gainers. Elon Musk is a staunch supporter of President Trump and traders are assessing that a second Trump administration see a lighter touch in terms of regulation. However, although a rally in tech may be on the way, trade tariffs could end up having negative consequences for the sector by potentially exacerbating trade tensions with China and disrupting international supply chains for key components. Bitcoin has also rocketed to a record high as crypto fans expect a more supportive regulatory environment.
On the bond markets, Treasury yields have been climbing sharply, as traders assess the implications of a fresh Trump presidency for inflation and US government borrowing. Not only is a raft of tariffs expected to be imposed next year if Trump wins, which will push up the price of imported goods for American shoppers, his vow to kick out immigrants with waves of deportations could also have economic ramifications, potentially pushing up wage bills for companies. His pledges of tax cuts are also considered to be inflationary and are also causing wariness about the huge US deficit swelling further. Republicans have already clinched the Senate but it’s still unclear which party will gain the upper ground in the House of Representatives which will also have significant implications for future budget agreements. If the House turns blue and the Democrats gain a majority it may limit the Republicans ability to bring in sweeping tax cuts.
There is a chance of course, that Trump won’t enact his most strident trade policies which headlined on the presidential election campaign. He vowed to increase tariffs by another 10% on most foreign products and impose much higher duties on goods from China. Even if such heavy tariffs are not swifty imposed, the threat of them is likely to make Chinese-US relations a lot more uncertain in the coming years and could hamper China’s economic recovery even further. However, his isolationist approach might make containing China over the medium and longer term more challenging, given that Trump isn’t likely to want to build alliances in the same way as we saw under Biden and this splintering effect may enable China to form new partnerships in a fractured world.
There are risks that inflationary pressures in the US, prompted by higher tariffs will be exported. As the dollar rises, countries which import commodities priced in USD may also see prices increases, which will either need to be absorbed by companies or passed onto customers. If other countries started to feel onerous effects of higher tariffs on their economies, there may be more demand for the dollar as it is considered to be a safe haven. This could be counter-productive to efforts to increase exports from the US as the stronger dollar is likely to make products of US exporters less competitive globally. When it comes to Europe, an increase in tariffs imposed on exports is likely to cause some pain, but given the dollar is also strengthening and is likely to be beefed up even further, due to inflationary pressures, the currency changes may help British and European firms maintain their competitiveness
Oil prices have dipped back amid expectations that under Trump more crude will flow from US wells. Given his America First mantra another Trump Presidency is likely to place emphasis on energy independence and his policies are likely to favour fossil fuels, promoting deregulation in the oil, gas, and coal industries. Brent Crude has edged down below $75 a barrel as traders also digest data showing that US crude stocks rose by 3.1 million barrels last week, more than expected. There is also a close eye being trained on the Fed’s commentary on Thursday after its decision on interest rates, which could also help build up a picture of expected demand in the world’s largest economy.’’
