Markets are crazy with Trump's Victory

This morning, I woke by 5 a.m. and realized that Trump was likely to be the next U.S. president.

In the past few days, we observed unexpected sell-offs and reversals in price patterns, highlighting the nervousness among investors and traders, given the uncertain outcome of the election.

As results began to indicate a decisive victory for Trump, here's what happened and an overview of what may transpire soon:

1) The U.S. Dollar (USD) will strengthen

The USD index (USDX) experienced in today's early hours its biggest one-day rise since March 2020. Investors anticipate that Trump’s policies will lead to higher economic growth but also potentially higher inflation. This is likely to negatively impact countries with significant sales to the U.S.

Additionally, if inflation rises, the Federal Reserve (FED) may need to slow down or even reverse the current interest rate cuts to prevent the economy from overheating.

Analysts predict the dollar could rally by 3% following a Trump win, while the euro could sharply decline below the key $1 level.

2) Bitcoin will rise and cryptocurrencies will rebound

As the USD was rising, Bitcoin also reached an all-time high. The Trump administration is expected to take a softer approach to cryptocurrency regulation, making Bitcoin a winner in this scenario.

3) America will be great again

With Trump's promises of reduced regulations, lower taxes for big corporations, and increased oil production, American companies are likely to benefit, which is positive for equities. Sectors such as banks, technology, defense, and fossil fuels are expected to see gains.

Goldman Sachs estimates that reducing the corporate tax rate from 21% to 15% could boost S&P 500 earnings by approximately 4%.

However, Trump’s protectionist policies and tough stance on China may raise costs and reduce profitability. Investors in the stock market should be aware that a strong dollar, rising U.S. interest rates, and trade tensions could favor defensive sectors, while multinational companies exposed to foreign markets may face challenges. Sectors vulnerable to tariff changes such as semiconductors, automobiles, and clean energy are likely to be volatile.

4) Treasury yields will rise

The already concerning U.S. government debt and fiscal deficit may increase further, which could drive up borrowing costs or Treasury yields. Treasury yields rose nearly 50 basis points in October as markets began to factor in a higher likelihood of a Trump win.

With the Fed having less flexibility to cut rates, Treasury yields are expected to remain elevated, prompting investors to diversify their portfolios by adding more bonds.

5) Economic growth prospects for Europe and Asia will be suppressed

Tariffs and other policies are likely to pressure economies heavily reliant on exports to the U.S., adversely affecting currencies like the euro (EUR), yen (JPY), and Swiss franc (CHF). Higher inflation may limit the ability of central banks in these regions to cut rates as needed.

Analysts expect global yields to rise.

6) The U.S. can become the world's top petroleum producer

Trump aims to maximize U.S. oil and gas drilling by expanding federal leasing and rolling back environmental regulations where feasible. This increased supply could help keep U.S. West Texas Intermediate (WTI) crude futures, which have dropped around 4% this year, relatively low. Additionally, Trump is likely to intensify enforcement of oil sanctions on Iran, potentially reducing global crude supply. He also promised to fill the Strategic Petroleum Reserve to unprecedented levels, providing additional support to prices as the government enters the markets.

7) Commodities will be under pressure

If you are involved in commodity trading, you may have observed a significant surge in shipments of a record soybean harvest before the upcoming election. This urgency was driven by concerns over potential escalations in trade tensions with China, the largest importer of soybeans globally. It is anticipated that Beijing will retaliate with tariffs on U.S. soybean exports.

The tariffs imposed on Chinese products are expected to adversely affect the metals market, given China's role as a leading consumer of copper, iron ore, and steel. Consequently, the industrial metals and steel sectors in China may encounter significant challenges.

A robust U.S. dollar typically initiates a decline in global trade growth, as it serves as the primary currency for international transactions and possesses the highest purchasing power. Therefore, when the USD strengthens, other currencies tend to weaken, resulting in a decrease in global wealth and a reduced capacity for international trade.

8) Gold will not shine as bright

Gold is seen as a hedge against geopolitical and economic uncertainties and tends to thrive in a low-interest-rate environment. With the FED beginning a two-day monetary policy meeting today and expected to deliver another 25-basis-point rate cut, Trump's victory could undermine the outlook for U.S. monetary policy.

Trump’s policies are viewed as inflationary and, therefore, can negatively affect gold in the near term if interest rates do not continue to decline. For now, any pullback in gold prices is likely to be shallow, as it will still attract safe-haven investments in the early days of a Trump presidency.

9) Emerging Economies Will Face Challenges

A robust USD can create significant challenges for emerging market nations due to their interconnected supply chains and reliance on commodity imports. This strength is likely to exert inflationary pressures on these markets, as they generally acquire their raw materials priced in USD.

The South African rand (ZAR), the Brazilian real, and the stock markets in these nations are at risk if tariffs are increased, as are semiconductor manufacturers in Taiwan, South Korea, and other countries that supply Chinese technology firms.

A sell-off in U.S. Treasuries and a rise in the dollar will likely withdraw capital from emerging markets and compel many nations to adopt stricter monetary policies.

However, emerging economies with strong domestic growth and reform narratives, such as India and South Africa, may find opportunities and serve as safe havens in an otherwise turbulent global environment. Chile, a significant producer of copper and lithium, could be relatively insulated due to the unique nature of its exports.

10) Climate change will no longer be a U.S. concern

Trump plans to reverse environmental regulations that limit oil and gas extraction and coal mining, aiming to enhance the profitability of these industries. He has also committed to "rescind all unspent funds" allocated under the Inflation Reduction Act, which is the Biden-Harris administration's flagship climate initiative that encompasses substantial financial support for electric vehicles, as well as solar and wind energy projects.