Former President Trump has secured a sizeable victory in the 5 November election, accompanied by a sizeable if not filibuster-proof GOP majority in the Senate. He will see this as a strong mandate, which will likely make it easier to get nominees confirmed and proceed with many parts of his agenda, although the fiscal space is limited especially if the final composition of the house skews narrowly Democratic or Republican. The final composition of the House will be key on many issues including tax cuts – extending these would require cuts in other policies which in turn would impact enforcement of other policies. Overall though, the very scale of the victory, Trump’s own dealmaking focus and approach will add to policy volatility on a range of foreign and economic policy initiatives. Trump is likely to return to a preference for bilateral deals, “fair trade” agreements, and perhaps some more openness to investment in exchange for trade and export exemptions.
Some policy priorities are clear- stopping migration, boosting energy and using tariffs for a range of fiscal and trade goals. He would intend to support local manufacturing and onshoring but would be more inclined to hope broad tariffs and tax cuts would make the US more attractive, rather than rolling out new incentives. However, there are significant implementation questions due to divides within the likely staffers and Trump’s dealmaking approach which could allow domestic and foreign negotiating partners to try to reset relationships.
The political class mandate to “show us the policy” demanded of Harris, was not applied to Trump in the same way meaning that some areas of focus are as yet undecided. Expect a return to bilateral negotiations especially with major economies, threats and follow-through on tariffs, with some exemptions for key goods or possibly key partners. The deal-making approach and divides between advisers suggest more uncertainty about policy objectives and the possibility trading partners may seek to pitch new deals. It is possible investment pledges and voluntary trade reduction could be part of new “fair trade” focus. In general Trump is more likely to use tariffs over export controls to manage Chinese competition.
The relatively quick victory paradoxically reduced a major political risk – that of drawn out legal processes, occupation and protests. Markets viewed this positively. The elections were however marred by blatant interference including bomb threats across Democratic areas in Georgia that were linked to Russia as well as ballot box fires. And of course the risk of political score-settling is high and could distract from other priorities – including in the DoJ enforcement. All of these undermine the democratic process.
Markets upbeat, Inconsistencies Ahead: US market reactions were swift, with dollar, interest rates and equities rising sharply, a somewhat unusual combo responding to expectations of tariffs, deregulation and tax cuts. EM currencies generally sold off, as reflects stronger dollar and higher rates, especially some of the higher yielding more open economies. More closed economies which are less vulnerable to tariffs or are making fiscal/monetary adjustments did a bit better. More differentiation will come in future based on fiscal and monetary space. Bitcoin too rallied on hopes of crypto deregulation and debasement fears. Gold by contrast stalled out due to the rate rise, but it may benefit from the inflation and uncertainty.
The short-term gain on lower regulation hopes, may fade if Trump really rolls out his planned broad tariffs on China and the global partners. The broad trend will likely be towards higher long-term interest rates and a stronger dollar. This in turn could undermine equities and risk assets.
Most commodities faltered, including oil, which had stabilized on OPEC+ can-kicking earlier in the week, perhaps due to growth uncertainty or tariffs or just continued concern about Chinese demand.
The Fed meets this week and is likely to move ahead with another rate cut (25bps) but the outlook remains uncertain. Markets will be looking for signals about the shifts in Fed oversight. While priorities will differ, the debt dynamics will be a constraint on monetary policy and indeed on some investment.
Domestic Energy a Focus, Regulations Easier Investment could lag: On the energy side, Trump has been vocal about the desire to remove environmental regulations and reviews and to reduce subsidies for renewable energy and especially Electric Vehicles. For the last year, press reports have suggested Energy company execs were drafting Executive orders for day one to reduce regulation and this seems likely. A quick removal of the LNG review pause seems likely even if the volume of projects approved doesn’t increase quickly. Some American politicians will toy with the idea of restricting exports of natural gas to keep prices low at home. Many tradeoffs are present- there will be a disconnect between Trump’s Drill Baby Drill rhetoric and the actuality given that financial outlook and returns will drive investment. While US energy companies have become more efficient, and reduced regulations may bring cost savings, its hard to see meaningful production increases. Plus more buyers of US energy care not just about price but about full-life cycle emissions. Overall, assume it may be theoretically easier to build projects and infrastructure (permitting and reviews), but interest rates and supply chain costs (especially if tariffs drive up component imports and labor mismatches persist suggest less activity.
Threats to claw back the IRA and CHIPS Act may be more symbolic given the benefit these efforts have had on domestic manufacturing and onshoring. Changes would be difficult in a narrow Spending elsewhere will increase efforts to redirect unused funds, especially in basic research. However, subsidies on many renewable energy projects may survive and the data center driven push for power demand will be a support for nuclear and a wide range of power projects. New partners are possible.
Sanctions/export control priorities will shift: On the sanctions side, choices made about staffing or focus on other issues including border security will have major impact on enforcement. In general enforcement of sanctions, export controls and related measures are likely to be lower and priorities shift. For China, a Trump administration may hold over many of the technology export control measures proposed by the Biden administration for now, but could choose to negotiate away some of these (EVs?) in exchange for trade. Tariffs not export controls and bans will be a higher priority tool. What will a good deal look like? How will advisors like Elon Musk influence targets goals and investment efforts.
Trump is likely to try more enforcement of Iran oil sanctions and might be less worried about associated oil price spikes and China risks. The developed illicit financial network selling Iranian crude means that cutting exports would necessitate blunter restrictions on the buyers and intermediaries involved in the trade including potentially the Chinese banks, refineries and Malaysian and Emirati intermediaries involved in the Trade. A big uncertainty for Iran policy is the response of their GCC Arab neighbors who are more willing to live with Iran if the regional and nuclear ambitions are trained elsewhere. This is a big change since the Trump administration and indeed the US pivots from the region or attempted ones were a major driver of this shift.
Less enforcement of Russia sanctions especially the energy ones like the price cap is possible, potentially linked to negotiation efforts. The price cap is seen to benefit Russia and China and has created a network of intermediaries that skirt G7 financial services and regulation. Other Russia sanctions including those linked to military procurement and government entities may remain in place.
On Venezuela, the path is less clear, but a return to maximum pressure seems unlikely. The current limbo could continue for some time, with direction depending on the debtes between advisors. Instead a migration/deportation related deal could be possible especially if there is an opening for US business. Dealing with the debt burden, power shortages and more will be limitations on any investment. In the interim, Venezuela will struggle to attract new capital given the persistent sanctions.
Ziemba Insights 