The US presidential election on Nov 5 was one of the most anticipated events of the year and the result was a surprisingly clear victory for Donald Trump and the Republican Party.
Trump won the important swing states -- Pennsylvania, Georgia, North Carolina and Wisconsin -- and secured more than the 270 electoral votes necessary for a second term as president.
Voters appear to have punished the Democratic administration of Joe Biden and Vice-President Kamala Harris for higher living costs, a legacy of the pandemic, as well as concerns about Middle East politics and a perceived lack of clarity about Ms Harris's profile, failing to win over voters despite an otherwise strong US economy.
In our view, the Trump sweep promises to support US economic growth, which is already running at a decent level. US growth will end up well above its potential, contributing to rising inflationary pressures. Inflationary risks could also increase depending on trade policy, should large tariffs be implemented on a global scale.
Given the unique global position of the US as a driver of consumer demand and its notable absence in the rest of the world, we see a good chance that US tariffs could be largely absorbed by importing countries rather than US consumers. The result is a modest impact on US inflation, while tariffs could become a disinflationary driver in China and possibly Europe.
Judging from the initial reaction post-election, markets are taking the results in stride, as the likely extension of the Tax Cuts and Jobs Act and looser regulations could potentially translate to higher economic growth in the US. These developments, combined with generally higher fiscal spending, should translate into a positive impact on earnings growth for US equities, giving a further boost to cyclical sectors such as industrials and quality mid-caps, which are among our favourites to position for the cyclical recovery in global growth.
Moreover, Trump's perceived policy preferences favour segments such as banks, oil and gas, and defence stocks. We maintain our long-standing preference for remaining invested in US equities, which should receive a further boost from a Trump sweep relative to their European peers.
The higher potential for new trade tariffs should increase the risk premiums of European equities. In our opinion, industries such as automobiles, semiconductors and chemicals are most exposed to the tariff risks.
ALL EYES ON THE FED
With US election uncertainty now out of the system, the markets are once again returning to data dependency and a focus on the Federal Reserve until more clarity on policies becomes available after Trump's inauguration on Jan 20.
The day after the election, the Fed followed through with its expected interest rate cut of 25 basis points (bps) and refrained from any pre-commitment to further moves. The question remains how much higher the terminal rate will be as a result of Trump's policies. We expect two more rate cuts of 25bps, to a range of 4% to 4.25% by March 2025, which would leave the policy rate in slightly restrictive territory to fight rising inflation.
In the fixed income space, as the most bond-bearish outcome -- a Republican sweep of the presidency, Senate and House -- appears to have crystallised, yields are moving higher in the aftermath. Given the volatility in US Treasury markets, it is difficult to declare that longer-term yields have reached an attractive entry point just yet, even if the level looks more appealing again. We still see more value in corporate debt, which remains in a position to dampen some moves in a world of higher fiscal vulnerabilities and uncertainties.
Considering gold's record-breaking run this year, which recently reflected the growing chances of another Trump presidency, its dip in the aftermath of the election looks like a "buy the rumour, sell the fact" situation.
ECHOES OF 2016?
Looking ahead, the big question for the gold market is how different today's version of Trump will be from the one who won the election eight years ago. Back then, expectations of pro-growth policies supported the dollar and lifted US bond yields, which in turn weighed on gold prices. By the end of 2016, gold prices were down more than 10% from election day.
While we expect higher growth, a stronger dollar and higher bond yields this time around, the outlook for gold seems different. There are broad-based concerns in the gold market about ballooning fiscal deficits and rapidly rising debt levels in the US, which at some point could undermine the US dollar's role as the world's reserve currency. In addition, there is Trump's geopolitical agenda, which is shaped much more by confrontation than conciliation.
In our view, the bigger picture for the yellow metal remains very much unchanged. Central banks are increasing their gold reserves to be less dependent on the dollar and less susceptible to US sanctions. This applies particularly to the People's Bank of China, which still has a rather low share of gold in its currency reserves. Renewed signs of central bank buying, particularly from China, should be much more important than the outcome of the US presidential elections.
Kean Tan is Head of Investment Solutions at SCB-Julius Baer Securities Co Ltd.