Trump 2.0: Market impact & implications

The Dollar Index, which compares the value of the US dollar to a basket of six major currencies, continued to rise, closing at 104.35 compared to 104.20 in mid-July.

US President Joe Biden’s decision to drop his reelection campaign and support Vice President Kamala Harris gave the Greenback a boost. The move is thought to increase the likelihood that Republican nominee Donald Trump will win back the presidency.

Because of his preferred combination of high tariffs and low taxes, analysts saw a Trump victory as generally supportive of the US dollar, which are thought to be driving up interest rates and inflation.

Trump’s Return: What could it mean for Europe?

Prediction markets currently give Donald Trump a very high percentage chance of winning in November, indicating that the possibility of a second Trump presidency is growing. Analysts believe that a Trump 2.0 presidency could have a significant impact on Europe given the significant geopolitical and economic changes that occurred during his first term.

The reinstatement of Trump’s aggressive trade policies would be among the most immediate effects of his re-election. Trump has promised to apply a 10% tariff to all imports into the United States, including goods from Europe. As was the case during the 2018–2019 trade war with China, this would probably result in increased trade policy uncertainty.

In particular, the last trade war reduced industrial production in the Euro area by approximately 2%, which resulted in a 1% decline in GDP. The EU is predicted to retaliate if Trump imposes these additional tariffs, intensifying trade tensions. Additionally, analysts point out that because of their heavy reliance on trade and industrial activity, the economies of Europe, particularly Germany, would be especially vulnerable. A slight increase in inflation could result from the higher tariffs, but the main impact would be a slowdown in economic growth.

The defence and security sectors would be significantly impacted as well. Trump has persistently advocated for NATO allies to boost their defence budgets to two percent of GDP. Meeting Trump’s demands would require an extra 0.25% of GDP annually from European nations, which currently spend roughly 1.75% of GDP on defence.

Furthermore, European countries may be forced to raise their spending by an additional 0.25% of GDP due to Trump’s position on withdrawing US military support for Ukraine.

The European military’s high import share means that even though growth might be slightly boosted, the majority of that gain would go toward the U.S. economy. Furthermore, higher deficits might force Europe’s long-term interest rates higher, potentially offsetting any gains in growth.

Europe may also be impacted by Trump’s domestic policies, especially his tax cuts and deregulation. These policies’ effects on increased U.S. demand could marginally boost activity in the Euro area. However, stronger long-term yields, rising prices for stocks, and a stronger dollar, which were witnessed in the financial markets following Trump’s election in 2016 are anticipated to have less of an effect this time around.

Trump’s 2024 plans: Addressing inflation, energy, & taxes

Inflation - تورم

Declaring that this is the worst inflation the US has ever experienced, Donald Trump condemned the Biden administration. He went on to say that inflation has destroyed the nation and had an effect on the whole economy.

The US inflation rate peaked at 9.1% before declining. It remains higher than the 2% threshold set by the US Federal Reserve, the nation’s central bank. However, the people have not experienced much relief from this. The percentage of daily purchases affected by inflation is still high.

Trump went on to say that his administration will implement a number of relief initiatives, including removing the tip tax, increasing tariffs on foreign goods, and expanding oil drilling.

Energy

The US is currently experiencing an energy crisis as a result of climate action plans that have prohibited the country from engaging in oil production and exploration. According to Trump, he will keep exploring more and lowering energy prices. He continued by saying that exploration, storage, and transportation expenses would need to decrease.

Taxes

Trump has pledged to remove all taxes from tips that service personnel receive. He emphasised that the highest individual income tax bracket was lowered from 39.6% to 37% in 2017 as a result of the Tax Cuts and Jobs Act, and the standard deduction rates were almost doubled. In a nutshell, he pledged to stop inflation, give people more money, and restore individual employment.

How Trump 2.0 could boost investor confidence

Major financial markets had a rather muted initial response regarding Trump’s re-election. The 10-year US Treasury yield increased by roughly 0.2 percentage points to 4.48 percent in the bond market, while the yield on the two-year note increased by half as much. This was the most significant move. The result was a slight “disinvestment” in the yield curve by bond investors, who presumably discounted the possibility that under Trump 2.0, federal deficits would be larger, the economy might be stronger, and inflation might rise.

A lot of investors were afraid that Trump’s first-term policies would have negative financial and economic effects. But from the fourth quarter of 2016 to the fourth quarter of 2019, right before the pandemic, real GDP increased by 8.5% to a record high. Consumer price inflation was relatively low during this time, hovering around 2%. During this pre-pandemic period, the yield on a 10-year Treasury bond began and ended at approximately two percent. From the end of 2016 to the end of 2019, the S&P 500 increased by about 50%.

Could we see something as harmless as this under Trump 2.0? It is undoubtedly feasible. The financial markets and the economy may be significantly impacted by the White House’s policies. Nevertheless, during the legislative process of becoming law, Congress frequently modifies those policies.

Trump’s policies are less likely to be weakened by politics if the Republicans take control of the White House and both chambers of Congress. It is hard to predict given the political volatility of the moment, especially if the biggest Democratic donors decide to move their emphasis from winning congressional races to the White House following Biden’s poor debate performance.

In fact, Washington may intervene less in the economy in the years to come, particularly if Trump, who leans toward advocating for government deregulation of business, is re-elected. He would have more freedom to follow this path after the Supreme Court drastically curtailed the federal regulatory agencies’ ability to interpret ambiguous laws passed by Congress. There’s little doubt that Trump would limit or reverse the “administrative state” by appointing judges and senior agency personnel. He would undoubtedly encourage increased US gas and oil production, which would help to contain inflation.

History demonstrates that regardless of the President, the US economy and stock market have performed well over time. This does not imply that there would be no risks for Trump 2.0. Under a Trump administration, the two main risks are: Firstly, a trade war that slows down the world economy and increases inflation and secondly, growing federal deficits that lead to a debt crisis. Nonetheless, the United States’ system of political checks and balances persists in its ability to temper the extreme policy objectives of the president.

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