Election week showdown: How Trump’s victory, FED Decisions, and China’s policy moves will shape global markets

With Donald Trump winning the U.S. presidential election, alongside the upcoming Federal Open Market Committee (FOMC) meeting and the gathering of China’s National People’s Congress (NPC) Standing Committee, investors are closely monitoring these events for their potential impact on global market sentiment and economic outlooks. Here, we explore what these developments could mean for the markets and beyond.

Trump's economic agenda: tax cuts, tariffs, and their potential impact on growth, inflation, and the U.S. Deficit

Trump’s victory, securing the U.S. presidency with 295 electoral votes, has drawn global attention, concluding a close race against Vice President Kamala Harris. His agenda, which includes tax cuts, regulatory rollbacks, and increased border security, carries significant implications for the U.S. economy and international trade. Specifically, Trump has proposed reducing corporate income tax rates from 21% to 15% for U.S. companies producing domestically, along with modifications to the 2017 Tax Cuts and Jobs Act (TCJA). This suggests a pro-business environment, emphasizing economic growth through lower taxes and reduced tariffs.

To finance his agenda, Trump has proposed imposing tariffs of 10% to 20% on general imports and up to 60% on Chinese goods, while reducing environmental regulations, such as halting the Environmental Protection Agency’s electric vehicle standards, and partially repealing the Inflation Reduction Act. He also plans to eliminate taxes on income from tips, overtime pay, and Social Security benefits, aiming to reduce the financial burden on American workers. While Trump’s “America First” policies are pro-growth and supportive of the fossil fuel industry, they also pose potential challenges for global climate initiatives and long-term economic sustainability.

Analysts suggest that Trump’s policies could increase the U.S. deficit by approximately $7.5 trillion over the next decade, potentially leading to inflationary pressures and influencing the Federal Reserve's rate policy. In contrast to the expected rate cuts under a Harris administration, Trump’s agenda might prompt the Fed to pause or even reverse rate cuts to manage inflation. Currency strategists, including those at Jefferies, project a potential 7% to 10% appreciation in the U.S. dollar in 2025 under Trump, driven by his pro-growth, protectionist economic stance.

Fed’s rate cut path uncertain amid Trump re-election

On Thursday, the Federal Open Market Committee (FOMC), the branch of the Federal Reserve responsible for setting monetary policy, announced a 25-basis-point rate cut, with another expected in December. However, Trump’s re-election could alter the Fed’s outlook in 2025, as stronger near-term growth prospects might lead to a more cautious stance on further monetary easing. While Harris's policies might have aligned with the Fed’s planned rate cuts, a Trump administration could introduce economic volatility that affects the timing and extent of rate adjustments, potentially pausing the Fed’s current easing trajectory.

Trump's encore: Fiscal spending, ballooning debt, and market reactions

A second Trump term, particularly if paired with a Republican-majority Congress - which consists of the Senate and the House of Representatives - raises concerns about fiscal sustainability and U.S. debt, with potential implications for global markets. Increased fiscal spending and rising debt levels could undermine the long-term health of the U.S. economy, influence allied fiscal policies, and put pressure on central banks in Latin America. If global markets begin to question the sustainability of U.S. debt, it could negatively impact corporate profits, economic growth, and equity markets, while also placing long-term downward pressure on the U.S. dollar. In such an environment, safe-haven assets like gold might attract investors, particularly amid rising inflation and fiscal uncertainty.

Meanwhile, the U.S. election results appear supportive of U.S. financial assets, particularly equities and the dollar. Treasury yields, especially for longer maturities, are expected to rise. While the outlook for gold remains positive, higher U.S. rates and a slightly stronger dollar may initially limit its gains.

In China, economic and market dynamics are shifting, with the MSCI China Index rallying since mid-September in anticipation of substantial fiscal stimulus announcements from the NPC Standing Committee meeting scheduled for November 4-8. Investors expect a multi-year package of up to RMB 10 trillion (approximately EUR 1.3 trillion), with RMB 6 trillion (EUR 780 billion) allocated to local government debt swaps and RMB 4 trillion (EUR 520 billion) to aid local governments in acquiring idle properties and land. Trump’s victory could further intensify trade tensions and lead to additional tariffs on Chinese exports, though these might only be implemented in early 2025, allowing Beijing time to adjust domestic policies. A focus on domestic stimulus, including property sector support and urban renovations, may alleviate some pressure from external demand fluctuations and stabilize the Chinese economy.

From global to local: China’s market will have to adapts to Trump's second term

In response to Trump’s win, China may intensify its focus on bolstering domestic demand, benefiting sectors less reliant on U.S. trade and vulnerable to sanctions. Shortly after Trump’s re-election was announced, offshore-traded Chinese equities declined, while onshore indices performed relatively better, reflecting the divergent impacts on internationally exposed sectors versus domestic ones. Additionally, as China’s market is now more retail-driven, investors are likely to react quickly to domestic policy moves, responding to policy catalysts rather than traditional fundamentals.

In response to Trump’s win, China may intensify its focus on bolstering domestic demand, benefiting sectors less reliant on U.S. trade and vulnerable to sanctions. Shortly after Trump’s re-election was announced, offshore-traded Chinese equities declined, while onshore indices performed relatively better, reflecting the divergent impacts on internationally exposed sectors versus domestic ones. Additionally, as China’s market is now more retail-driven, investors are likely to react quickly to domestic policy moves, responding to policy catalysts rather than traditional fundamentals.

Defense spending and economic volatility for allies

Trump’s return to office could renew expectations for U.S. allies in Asia—such as Taiwan, Japan, South Korea, and the Philippines—to increase their contributions to defense costs, a stance he advocated during his first term. While both Trump and Harris shared protectionist tendencies, Trump’s approach is likely to be less predictable, with the potential for sudden trade disruptions. For Asian economies, the broader economic outlooks of the U.S. and China will be crucial, as their growth trajectories will significantly influence regional trade and stability.

Similarly, a Trump victory could have substantial implications for Europe. Trump might pressure European nations to increase defense spending by threatening to reduce U.S. support for Ukraine, which could lead to increased defense spending requirements across Europe. As a result, higher fiscal deficits could steepen European yield curves as governments finance the expanded defense budget. This shift may create a more volatile economic environment in the region, with potential ripple effects on Europe's growth and stability.

Both Trump and Harris had expressed firm positions on China; however, Trump’s victory is likely to heighten trade tensions and potentially lead to broader tariffs, adding uncertainty to the global outlook. In the coming months, the interplay between Trump’s pro-growth, protectionist policies, the Fed’s cautious stance, and China’s evolving domestic policy response will set the stage for economic and market shifts worldwide. How these dynamics unfold will depend on policy developments and investor sentiment across the U.S., China, and key global markets, shaping the economic landscape for years to come.

Never a dull moment, nowhere in sight

Both Trump and Harris had expressed firm positions on China; however, Trump’s victory likely means heightened trade tensions and potentially broader tariffs, adding uncertainty to the global outlook. In the coming months, the interaction of Trump’s pro-growth, protectionist policies, the Fed’s cautious stance, and China’s evolving domestic policy response will set the stage for economic and market shifts worldwide. How these dynamics unfold will depend on policy developments and investor sentiment across the U.S., China, and key global markets, shaping the economic landscape for years to come.