On 5 November, Donald Trump secured a comfortable victory in the US elections, gaining control of both the Senate and Congress (52 out of 100 seats, and 277 out of 538, respectively). This result consolidates a Republican majority after four years of Democratic rule and provides the Trump administration with ample leeway to implement its policies, based on strongly protectionist foreign trade, more favourable taxation for companies and greater pressure on the Federal Reserve to reduce interest rates.

Donald Trump’s policies

Donald Trump's victory with Republican majorities in both houses of Congress implies a significant change in trade, tax and regulatory policies in the United States. A cornerstone of his plan is an increase in tariffs, especially to China and other countries with a trade surplus with the United States, such as Vietnam and some European economies. This protectionist policy seeks to stimulate national production and reduce dependence on imports. The tougher stance on trade policy is complemented by renewed pressure on the Federal Reserve to force interest rates lower, a goal that clashes with the principle of independence advocated by Federal Reserve Chairman Jerome Powell. On taxation, Trump wants to implement a more advantageous tax framework for US companies to offset the impact of new tariffs and a labour force that is expected to become scarcer with restrictive immigration policies.

Countries and sectors affected

This set of policies has various implications at both regional and sectoral level. On the one hand, Europe and China are emerging as the economies most affected by the trade tightening. Sectors such as the automotive industry, with high exposure to international trade, in particular, could suffer from increased costs associated with trade tariffs and reduced demand in strategic markets. Conversely, in the United States, sectors like traditional energy (especially oil and gas), the finance, the industrial sector (due to the likely expansion in construction of infrastructures) and materials (metals and mining) could benefit from regulatory relaxation and an additional boost to domestic production. There is also a stimulus for small and medium-sized businesses oriented towards the US domestic market, which would be protected from foreign competition.

Implications for the markets

These changes have a direct impact on fixed income markets. Trump's protectionist fiscal and trade policies could lead to higher inflation, especially in the short and medium term, leading to higher rates for longer. In turn, this would tend to push up US bond yields, with noticeable effects on the long end of the curve. Against this background, global yields could also experience increases, especially emerging market bonds, which face not only rising IRRs but also added pressure from the strengthening dollar. Credit should also see a rebound in IRRs.

2-year and 10-year American bonds

Source: Bloomberg and prepared in house

Regarding equities, these measures are likely to stimulate growth in the short term and this is likely to translate into an improvement in US share returns. This could overshadow other markets, adding to the importance of selecting companies and sectors outside the US. Meanwhile, China will face considerable challenges in the face of a potential reduction in exports that will require additional domestic stimulus to try to boost its economy.

For other alternative assets such as cryptocurrencies, the impact could be positive as during his campaign Trump made several promises aimed at the crypto community that could boost adoption and growth of the sector, reducing regulatory barriers and encouraging innovation and expansion of projects in the country.

As for gold, expansionary policies and increased government spending should attract investment interest in this physical asset.