Market guide: Republican sweep well-received by markets

Republican sweep well-received by markets

Trump has secured another term in the White House with a Republican majority in congress. The Republican Sweep was well-received by markets sending rates and inflation expectations higher in the US and equities higher across the board with the outlook for more expansionary fiscal policy. On this side of the Atlantic, European rates and inflation expectations tracked lower following the election with the already struggling European economy set to face further headwinds from a hawkish trade policy. The election win further highlights the increasing divergence between the US and European economy in terms of structural growth, productivity and regulation. Geopolitics remain in focus for markets with the war in Ukraine and the Middle East continuing with heightened focus on implications from the incoming Trump administration.

The past month, the USD has been the clear outperformer following the Trump election win securing a Republican Sweep with EUR/USD breaking firmly below the 1.06 mark. In the UK, the Labour government spooked markets by delivering an expansionary budget largely funded by borrowing, which led to a sharp rise in UK yields and triggered a sell-off in GBP FX. EUR/SEK has edged higher the past month, trading north of the 11.60 mark. USD/JPY continues to edge higher on cautious commentary from the BoJ and US rates tracking higher.

Outlook: Medium-term bullish on the USD and bearish on Scandies

The US election outcome reinforces our bearish outlook on EUR/USD, given anticipated pro-growth and inflationary policies in the US, along with our expectation of relatively stronger US growth dynamics compared to the euro area in the coming year. In the near term, however, we believe markets may have become overly hawkish on Fed pricing, and with downside risks to the cyclical US growth outlook, the USD rally could stall toward year-end. We remain medium- to long-term negative on NOK and think a continuation of the latest rally will prove but temporary in nature. For the SEK, we expect a short-term correction higher but expect a continued weak cyclical outlook, a stronger USD, and a Riksbank continuing to front run peers to remain medium-term headwinds for the SEK.

Risks to our forecasts primarily lie in a sharper economic downturn than what we pencil in. A much harder landing than what we pencil in would require sharp easing of global monetary conditions, which would likely entail a much weaker USD (after an initial squeeze higher) and much weaker cyclically sensitive currencies than in our base case. With the US Red sweep the risk of a re-acceleration of US inflation and hence USD real rates in the coming years has risen.

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