Trump 2.0: What’s next and what does it mean for markets?

Overview

A quicker-than-expected conclusion to the US presidential race saw sentiments returning to risk-on in Wall Street overnight, as positioning for political uncertainties unwind. The VIX plunged 10%, while gold prices were down more than 3%. Chatters that the results could take days or even weeks to conclude were quickly dispelled within a matter of hours.

What’s next?

Of course, we still need to see who takes control of the US house, but with the Republicans inching closer to the finishing line (205-190), the chances of Democrats taking back control of the House just gets narrower. A potential Red Sweep could mean little resistance to Trump’s tax cuts and spending plans, along with his business-friendly deregulation approach.

We have seen the rates market recalibrating to Trump’s victory with a paring of rate cut bets in 2025. A cumulative 100 basis point (bp) of cuts through 2025 is now the consensus. So while the Federal Reseve (Fed) may follow through its own guidance with a 25 bp cut this week and another 25 bp cut in December, we may see policymakers leaning towards a less dovish tone, so as to leave some room to address the unwanted risks of another bout of inflationary pressures from a Trump presidency and more so, a Red Wave.

What may it mean for markets?

US

A lean into the cyclicals and the underperformance of defensives should remain the theme into year-end, as any upcoming announcements from Trump will be pro-business in terms of fiscal spending, tax cuts and deregulation. Anticipation of upcoming fiscal plans may allow sentiments to bask in optimism.

A more gradual path of rate cuts should benefit financials on lessening pressures on their interest margins. Deregulation efforts should benefit energy, financials and technology, as seen in Trump’s presidency in 2016. Upcoming fiscal plans and focus on “America First” may benefit industrials. Overall year-end seasonality remains positive as well, while the run in US economic upside surprises and corporate earnings momentum may add further tailwind to the risk environment.

China

We may expect risk-taking to be limited for now, as anticipation builds around potential tariffs under a Trump administration. Trump’s approach as seen in 2018 may be to go hard on China at the onset, before trying to negotiate to a middle ground. So in a way, things could get worse before it gets better.

Tariffs of as much as 60% on Chinese goods were a key part of Trump’s campaign, so that should be the starting point, which could trigger much jitters. More targeted support to affected industries, weakening of the yuan and retaliatory tariffs may be part of China’s toolbox, while its quests to reduce reliance on foreign technology and improve domestic demand should continue. But if history is any guide, the initial phase of the 2018 trade war saw Chinese equities dipping more than 25%.

Singapore

With the index’s significant exposure to banking stocks, a more gradual rate-cutting process from the Fed should translate to a slower taper in their net interest margins. Coupled with the recovery momentum in its non-interest income, the banks should continue to be the key drivers for the performance of the Straits Times Index (STI). A more than 5% dividend yield remains attractive as well, offering both a growth and income story for investors.

The risks may come with any secondary impact from US tariffs on China, given Singapore’s trade-dependent economy. The STI has formed a top during the onset of the 2018 trade war and another round of trade tensions may see a similar reaction. But while news await on that front, a break to a new higher high for the STI may seem to leave sight on its all-time high at the 3,900 level for a retest.

Japan

In the 2018 trade war, the Nikkei saw a 16% retracement, which is relatively resilient compared to its Asian counterparts. But despite being US close ally, Trump may not hesitate to put the roughly 1.5 million vehicles that Japan exports to the United States each year under his crosshair. A 10% to 20% tariff on ‘everything else entering the US’ has been floated during his campaign. But of course, US decoupling from China may have some positive spillover onto Japan, as global supply chain seeks diversification. The overall net impact can be hard to grasp for now without more clarity.

The stronger US dollar may be a challenge, especially with the USD/JPY back at its July 2024 levels. Japan is already on the US’ currency manipulator watchlist, so further weakening may invite criticism from Trump and put Japan’s trade surplus with US under the radar. Not to mention the imported inflationary pressures and the capital outflows from widening yield differentials.

We expect the Bank of Japan (BoJ) to hike rates by 0.1% in December on improving wage-spending dynamics, but it may be insufficient to overturn the upward trend in the USD/JPY. Buying on dips may remain the strategy here.