Back in the Game: Trump’s Comeback and Market Dynamics Across the World
Arun Giri
In recent years, global financial markets have faced significant challenges, grappling with the fallout of a global pandemic and geopolitical instability. Amidst this trying landscape, a question looms: What would the re-election of Donald Trump in 2024 mean for these markets?
Trump leads with increasing pace in the primary polls. According to survey data, Trump would, at present, also claim victory in the general election.
Although Trump's tweets have been statistically linked to fluctuations in the U.S. dollar value and a reduction in intraday trading volatility, the wider implications of his leadership for global financial markets warrants a deeper examination. With the political arena intensifying and the serious prospect of Trump getting elected again, I will examine the potential global consequences of his administration on global financial markets.
One Trade War Later… Has Trump Changed His Tone?
Although the Biden administration has opted to retain many of the Trump trade tariffs, trade policy would likely be more protectionist under Trump. His suggestions of a 10% universal tariff on all imported goods and a “matching tax” (reciprocal tariffs) for retaliatory tariffs would come at the expense of American importers and does not bode well for global markets. In 2022 the U.S. accounted for 13.2% of global imports alone. The employment of universal tariffs could lead to a significant reduction in global trade volumes, negatively impacting global economic growth. Countries which rely on exporting to the U.S. would be expected to face reduced export revenues and weaker demand for their products by U.S. consumers when prices rise.
Source: Lee, Tom. American Action Forum. Global Trade Analysis Project (GTAP) database.
Research conducted by the American Action Forum indicates that, in the likely scenario of retaliatory tariffs, U.S. GDP would decrease by 0.31% after the implementation of the proposed 10% universal tariff. Markets in China, Mexico, Canada, Japan, and Europe would suffer the most as the largest goods exporters to the U.S.
The proposed matching taxes would be damaging for Chinese markets as Trump targets them specifically with ‘eye-for eye’ levies, aiming to phase out Chinese imports of steel, electronics, and pharmaceuticals over 4 years.
Trump’s trade policy during his term stung the rest of the global economy and markets. 2019 saw a -0.69% change in global GDP growth YoY and the advent of the trade war in 2018 provoked the subsequent fall in the Hang Seng and Shanghai Composite, two Chinese indexes, by approximately 15% and 25% respectively.
Economists from the Federal Reserve Bank of New York and Columbia University estimated that U.S. companies lost at least $1.7 trillion in market value due to declining share prices. Direct studies around announcements of the imposition of 25% tariffs in 2018 found they resulted in 4.3% stock market price declines in select U.S. companies. About a quarter of this decline is attributed to direct exposure to the tariffs, while the other three quarters is linked to exposure to weakened supply chains or alterations in macroeconomic variables. A reignited trade war by Trump could temporarily depress the U.S. and Chinese stock markets again.
From Gaza to Wall Street: Tracing the Impact on Commodity Markets
The Israeli Defence Force (IDF) spokesman, Daniel Hagari, has suggested that the current conflict in Gaza will ensue throughout 2024. Trump adopted a strongly pro-Israeli policy, which if continued, could exacerbate tensions with countries hostile to Israel, such as Iran. This might bring geopolitical exposure to the U.S. stock market that has remained relatively well isolated from the war.
Trump recently suggested he would be taking a harder line against Iran if re-elected. While outright conflict is unlikely, if tensions were to seriously escalate between the two, oil prices and ‘safe haven’ assets like gold would be affected.
Historically, geopolitics, especially in the Middle East, has influenced oil prices.
Similarly, gold markets have been responsive to war. In 1977 gold rose by 23%. This was followed by subsequent 37% and 126% YoY returns in 1978 and 1979 respectively, all of which was spurred by the Iranian Revolution, the Iranian hostage crisis, and the Soviet Union’s invasion of Afghanistan. Immediately after 9/11, gold was trading at $296.00, up from $272.60.
Trump may cause momentary shifts in these markets, although they are highly unlikely to translate over longer time frames. The oil and gold markets are highly reactive, and often retrace quick movements, as evidenced recently after the beginning of the war in Gaza on October 7th, 2023. Though Brent crude almost reached $90 in October, it fell by 4.2% to $81.61 per barrel, back to levels seen in July 2023, months before the attack.
Fiscal Playbook Déjà vu
A senior economic advisor to Trump, Stephen Moore, has claimed that Trump would pursue expansionary fiscal policy from his first term if re-elected. This would include another round of individual and corporate tax cuts, likely encouraging a rally in U.S. stock market prices. The implementation of the cuts could trigger increased stock buybacks and bullish market sentiment which would be primary contributing factors in elevated prices.
After discussion with his economic team, Trump has also suggested that he would pressure the Federal Reserve to lower interest rates. With rates already expected to start falling gradually in late 2024, Trump may push for more aggressive cuts in a similar fashion to August 2019, when he personally criticised Jerome Powell on Twitter.
Trump’s hypothetical accelerated push for lower interest rates would alleviate some of the pressure on emerging markets across the world after the Fed’s hikes over the last two years. Indonesia, India, Kenya, Ghana, Brazil, and Chile all have debt denominated in USD. As rates fall and the dollar expectedly weakens, these economies could be aided by lower debt servicing costs and stronger bond markets.
A study conducted by The World Bank finds that emerging markets and developing economies (EMDEs) are influenced by changes in U.S. interest rates in varying ways, depending upon the underlying cause. “Reaction” shocks – that is changes due to perceptions of the Fed becoming more hawkish – were identified to cause particularly adverse effects, including the depression of equity prices, depreciation of currencies, and dampening of capital flows. In turn, Trump’s proposed pressure on lower interest rates would reduce reaction shocks and benefit emerging markets.
Results from the study emphasise this further. An increase of 25 basis points in U.S. 2-year yields driven by a reaction shock is estimated to nearly double the probability of a financial crisis from 3.5% to 6.6% in a given EMDE. Furthermore, the relationship is non-linear: an increase of 114 basis points from January 2022 to September 2022 caused a 36% increase in the likelihood of a financial crisis among EMDEs. From the beginning of the year until the paper’s publishing, 21 EMDEs reached agreements for additional financing and 7 EMDEs suffered at least a 30% depreciation of their currency against the dollar.
Trump’s Debt Tightrope: Balancing Populism and Reality
Trump’s populist rhetoric and controversial policies make him uniquely qualified to influence markets overseas, whether that be directly or via transmission through U.S. markets.21 Historically, his assertive foreign and economic policies have introduced short-term volatility to U.S. and global markets - and would likely do so again. Yet, it’s essential to recognise that Trump’s actions would be framed in the greater context he would find himself in.
Historical Debt Outstanding, retrieved from Fiscal Data https://fiscaldata.treasury.gov/datasets/historical-debt-outstanding/ , Dec 22, 2023
To significantly influence the markets, Trump’s policies would need to be fiscally viable. If he returned to fiscally loose policy, the treasury’s resolve would be tested and likely invite resistance as the debate surrounding U.S. debt obligations intensifies.22
The U.S. debt ceiling is the maximum amount of money that the U.S. government can borrow to meet their legal obligations through issuing bonds. Reaching the ceiling significantly increases the risk of the U.S. defaulting on their debt. In January 2023 the U.S. hit its debt ceiling, which then spiralled into a debt-ceiling crisis. Fitch lowered the U.S’ credit rating from AAA to AA+ in August and more recently Moody’s altered their rating from ‘stable’ to ‘negative.’
In November 2023 the annualised cost of servicing the federal debt accounted for 16% of total federal spending, a 2% increase from July the same year.23 While the issue of U.S. debt has been passed from one presidency to the next and Trump’s term alone saw 3 raises of the debt-ceiling, eventually it must be addressed.
Control of Congress will be pivotal; without it, passing legislation may prove difficult. As the political countdown continues, Trump's path to office, let alone legislative success, is far from assured. Nevertheless, we would be naïve to count out The Donald. He has a tendency to defy expectations.