Following the preliminary results of the 2024 US presidential election, Lombard Odier's global chief investment officer Michael Strobaek and chief economist Samy Chaar provided a detailed analysis of the potential global financial and economic impacts of a renewed Trump administration, which appears set to take control of both legislative houses. In a webinar on Wednesday 6 November 2024, the analysts explored the implications of this shift, moderated by Andreas Kessler, head of group communications.
A “Republican sweep”
Chaar set the scene by affirming that Republican presidential candidate Donald Trump is on track to win the Electoral College, with projections suggesting he could secure well over the required 270 votes--potentially reaching up to 300. While there remains a slim chance (30%–40%) of a Democratic-controlled House, the prevailing outlook points to a “Republican sweep.” Chaar explained that Trump’s return, alongside a Republican-led Senate and a strong Supreme Court presence, is likely to usher in an “America-first” policy stance, shaping fiscal, trade and regulatory landscapes for years to come.
Chaar outlined that, should the Republicans indeed control all branches, the administration’s policy approach would heavily prioritise domestic interests, encompassing tax cuts, regulatory reforms and restrictive immigration policies. Chaar suggested that this agenda would likely include broad tax cuts or the continuation of Trump-era tax reductions, coupled with a boost in pro-business regulations. Overall, Chaar noted, the combination of fiscal stimulus and deregulatory efforts could foster growth, but with potential inflationary risks due to restrictive immigration and trade tariffs.
Inflationary pressures and central bank constraints
The core of Chaar’s projection focused on the inflationary pressures arising from Trump’s approach. “We could see inflation hit 3.5%-4% temporarily in 2025 and beyond,” Chaar remarked, highlighting the aggressive tariff strategy on foreign imports that could exacerbate inflationary trends. While Trump’s rhetoric has included tariffs as high as 60% on Chinese imports and 10% on goods from Europe and Japan, Chaar clarified that the likely scenario is more moderate. Rather than blanket tariffs, the Trump administration may use targeted tariffs to pressure trading partners, leveraging these negotiations to secure American economic advantages. This transactional approach, according to Chaar, would temper inflation somewhat but still lead to a challenging environment for the US Federal Reserve, which may slow its rate-cutting agenda under inflationary pressure.
Strobaek commented on the potential short- to medium-term implications of this “Republican sweep” on financial markets. He equated Trump’s resurgence to other global events with wide-reaching effects, such as 9/11, Brexit and Russia’s war in Ukraine, underscoring the high stakes and far-reaching impact of this political shift. “Markets are already responding positively,” Strobaek said, noting a strong initial performance in equities, bolstered by a rising dollar and stable bond markets. Strobaek argued that this reaction stemmed partly from “fear of missing out” among investors.
Strobaek cautioned, however, that while the market reaction was enthusiastic, investors should consider the possibility that certain Trump policies might not face sufficient checks and balances. Markets traditionally thrive under balanced power dynamics, Strobaek noted, which may not be present in a consolidated Republican government. Additionally, Strobaek advised detaching Trump’s personal style from his policy impact, suggesting that the Republican win represented a broader voter mandate for policy change rather than simply support for Trump’s persona.
Equities, bonds and emerging markets
Chaar and Strobaek agreed that Trump’s return is broadly positive for US equities, given his pro-business stance, with lowered corporate taxes and deregulation anticipated to bolster company earnings. However, Strobaek pointed out potential volatility for US bonds, which may react to constrained Federal Reserve policy on rate cuts. With inflationary pressures likely stemming from Trump’s policies, Strobaek concluded that the Fed could slow its interest rate reductions, flattening the yield curve and potentially providing a favourable environment for the dollar.
The strength of the dollar and the less flexible Fed stance could pose challenges for emerging markets, Chaar mentioned, as the increased US interest rates would potentially draw capital away from emerging market debt. “Emerging market debt is going to come under pressure,” he noted, explaining that this shift could reverse recent capital inflows to emerging markets, a trend initially driven by expectations of a softer Fed policy.
Geopolitical tensions
The return of Trump to the presidency is also expected to exacerbate tensions with China. Strobaek argued that Chinese assets could come under renewed pressure, driven by an anticipated increase in tariffs and a less integrated global economy. He emphasised that “technology will continue to serve as a geopolitical battleground” in US-China relations. With Trump pursuing “America-first” policies, Chinese exports to the US could face new headwinds, impacting Chinese economic growth, which has already been under strain from domestic real estate and banking sector issues. In response, Strobaek projected that China would likely need to increase stimulus measures, which could temporarily support Chinese assets but would not provide a long-term solution to economic pressures.
Strobaek and Chaar concurred that the global trade environment has shifted towards a “bloc logic,” a transformation accelerated during Trump’s first term and driven by fragmented trade relations. As Europe adapts to this fractured landscape, it will likely need to rethink its trade policies, supply chains and energy sources. This shift could necessitate costly adjustments and long-term investments for the continent, which has yet to fully embrace the protectionist and self-sufficient strategies seen in the US and China.
2025 outlook
Looking to 2025, Chaar forecasted continued economic expansion in the US under Trump’s policies, with growth outpacing other developed economies. The Fed’s potential reticence to cut rates too quickly due to inflationary pressures could stabilise the US dollar and support ongoing growth. Chaar concluded, however, that while inflation may rise, it is unlikely to reach uncontrollable levels given Trump’s likely moderation on tariffs.
Strobaek ended the discussion by reiterating that while the immediate market outlook was positive, the influence of politics on markets would ultimately hinge on fundamental factors--earnings, growth and inflation--rather than any one political figure. He underscored the cyclical nature of US markets, expressing cautious optimism for a robust 2025. With supportive Trump policies potentially fostering a favourable environment for equities, Strobaek stated that investors could expect steady, if cautious, gains for US assets in the coming year.
As of this article's publication, Republican candidate Donald Trump had secured 267 electoral votes, just short of the 270 needed for a majority, while Democratic candidate Kamala Harris had 224 votes, positioning Trump as the likely winner of the 2024 US presidential election. Republicans had already gained a majority in the Senate and held a lead in the House of Representatives (196 to 177).
In response to these results, the US dollar strengthened against global currencies, including the euro, yen and pound, while US bond yields surged.
