After an initial stampede into “Trump Trades”, investors in some asset classes are tapering their enthusiasm as they question whether Donald Trump as a president will be able to push through his ambitious tariff proposals.
The dollar reversed much of its post-election surge by Thursday’s close, and is trading little changed on Friday. Treasury yields have also returned to recent ranges following a two-day whipsaw. Chinese stocks and the yuan, earlier hammered by concerns over higher tariffs, have since gained ground.
The moves point to an emerging reckoning that Trump’s policies as a president may differ from his promises touted on the campaign trail. As the market jolt subsides, focus is turning to the other big events: the Federal Reserve’s easing path and China’s fiscal stimulus.
“There’s a sense that even the most exuberant Trump Trade investors are taking a step back to think: at this point, are the bets overdone?,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank in Singapore. Traders are “thinking about the execution and how some of his policies can be transmitted effectively”.
A key question on investors’ minds is how much of Trump’s threatened tariffs — up to 60% on Chinese goods — will become a reality. Some are also taking profit on trades, including bullish dollar and bearish Treasury wagers, positions that have fared spectacularly well earlier this week on the expectation that Trump’s reflationary policies will spur inflation and keep rates higher for longer.
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As doubts start to creep in, assets seen as benefiting under Trump have largely moved sideways after the post-election pop. US stocks have been an exception, extending gains Thursday on speculation the new administration’s policies will be supportive for the nation’s companies.
Bitcoin has been little changed since surging to a record thanks to the president-elect’s pro-crypto stance. Bloomberg’s dollar gauge was up less than 0.1% on Friday. The 10-year Treasury yield held at 4.33%, after the Fed’s rate cut helped pare some of Wednesday’s surge.
Yet the trades may regain momentum, according to RBC Capital Markets.
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If the Republicans keep control of the US House, with the final counting still underway, the resulting sweep will smoothen the path for Trump’s tax cuts, immigration and trade policies, as well as a confirmation of his nominees. The market is in for a period of heightened volatility as traders react to headlines on policy developments.
“There is a lot of scepticism about Trump actually pursuing his proposed policies, particularly on tariffs,” said Alvin Tan, head of Asia FX strategy at RBC Capital. However, the sentiment may be temporary as “the market is underestimating Trump on trade policy — the US President has broad authority to implement import tariffs”.
Equities picks
For stocks, the momentum is more bullish as traders believe Trump’s pro-growth stance will propel the rally.
US equities have reached fresh record highs this week, with indexes of small-cap stocks and regional banks — companies among most exposed to domestic growth — surging. Investors expect these firms to prosper under a second Trump administration that has pledged to stoke economic growth while boosting corporate profits.
The case is less clear for Asia, with the extent of China’s fiscal stimulus holding the key to equities’ outlook.
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After an initial knee-jerk drop, China’s CSI 300 Index is headed for its best week in more than a month. While there are expectations that Beijing will roll out a bigger stimulus to counter higher tariffs, a disappointing outcome from the Standing Committee meeting of the National People’s Congress due later Friday may renew selloff pressure.
“With a Trump victory, we think the chance is significantly higher that fiscal stimulus will come on the strong side and include something reserved for Trump,” Evercore ISI analysts including Neo Wang wrote in a note. “As long as Beijing keeps doing the right things at home and takes advantage of Trump’s foreign policies, we think China’s economy could sail through his tariff storm.”
Charts: Bloomberg
