INVESTORS are starting to evaluate the risks that could arise from Donald Trump winning November’s US presidential elections after his victory in Iowa’s Republican primary. We see four key macroeconomic risks:
First, if he returns to the White House in January 2025, he has threatened a 10 per cent tariff on all goods entering the US. This would be far more wide-ranging than his first-term tariffs on Chinese exports and all US steel and aluminium imports. It would spark inflation, stop the Federal Reserve cutting interest rates, and cause the US dollar to surge, hitting currencies such as the euro, yuan and yen. The yuan plunged from 6.25 to 7.20 versus the US dollar when the US imposed three rounds of tariffs on Chinese goods from 2018 to 2019.
Second, a replay of Trump’s first-term corporate tax cuts may spur equities, but a larger budget deficit and spiking Treasury yields would be a greater risk.
Since the 2020 pandemic caused budget deficits to soar, bond markets have become highly sensitive to worsening public finances. The US fiscal deficit is already very high, near 8 per cent of gross domestic product, as a result of President Biden’s semiconductor, infrastructure and green-energy spending.
In 2022, UK bond yields surged when former Prime Minister Liz Truss slashed taxes. In 2025, Treasury yields could also jump if US corporate tax cuts were not funded by government spending reductions.
Third, the Fed’s independence may be threatened. A second Trump term may lead to political pressure to keep interest rates low. The president could also replace Fed Chair Jerome Powell, when his current term ends in early 2026, with a more pliant successor. Fears about the Fed’s status may cause Treasury yields to soar, hitting financial markets globally.
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Fourth, risks assets could also fall if a second Trump terms leads to uncertainty about the rule of law and chaotic policymaking: for example, if the president uses federal agencies to target opponents at home or pulls out of Nato, abandons allies abroad, refuses to aid Ukraine or shocks China on Taiwan.
In short, financial market volatility may increase sharply if Trump takes the White House in 2025. Investors will thus continue tracking US politics closely in 2024.
The writer is chief economist, Bank of Singapore
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