Wednesday, November 6, 2024

Explainer-What’s at stake for global markets in a Trump presidency

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(Reuters) – As Donald Trump appears poised to head back to the White House, the U.S. dollar and stock market are seen as winners, but a Republican presidency could weigh on bonds, emerging markets, clean energy and sustainable investing.

Here’s how:

CURRENCIES

A Trump presidency is seen strengthening the U.S. dollar, with investors expecting his policies to lead to higher inflation and growth than would have been the case under Democrat Kamala Harris. That will mean the Federal Reserve would need to keep rates high to prevent the economy from overheating, which in turn would be bullish for the dollar.

At the same time, Trump’s plans to impose tariffs on trade, force European allies to pay more for defense and suspicion of multilateral institutions are likely to depress growth elsewhere in the world, boosting the dollar’s allure. Citi analysts expect the dollar to rally 3% after a Trump win.

Analysts expect a sharp fall in the euro, possibly below the key $1 level, if tariffs and domestic tax cuts follow.

They also expect China’s yuan to slide further, as in 2018-2020 when it depreciated swiftly.

Higher dollar yields will also mean a return of carry-trades, with currencies such as the Japanese yen and Swiss franc already heavily sold in the run-up to the election.

Yet the Swiss franc will find support, analysts say, thanks to the country’s higher-value exports shielding it from tariffs and the currency’s tendency to outperform during periods of higher inflation.

With a Trump administration expected to take a softer line on cryptocurrency regulation, bitcoin is another potential winner. The world’s largest cryptocurrency rose to an all-time high on Wednesday.

STOCKS

Trump’s promise of less regulation and lower taxes for big corporations, more oil production and tough immigration policy point to stronger growth and inflation, viewed as positive for equities. Sectors such as banks, technology, defense and fossil fuels are likely to benefit.

His plan to cut the corporate tax rate to 15% from 21% would raise S&P 500 earnings by about 4%, Goldman Sachs estimates.

Even so, it is not yet clear how much of Trump’s tax cut plan will make it through Congress. At the same time, his protectionist policies and tough stance on China would raise costs, reduce profitability and hurt multinational companies.

Outside the United States, a strong dollar, rising U.S. rates and trade tensions will mean defensive sectors will do better and multinational companies with exposure to U.S. markets will take a hit.

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