The Trump trade bursts into action

Wall Street’s main indexes soared to record highs on Wednesday, driven by Donald Trump’s dramatic return to the White House after his 2024 election victory. In a stunning political comeback, Trump clinched a second term, and investors were quick to react to the prospect of lower taxes, deregulation, and a president known for making waves across markets—whether it’s the stock market, the dollar, or trade policies. While Trump’s proposed tariffs may bring inflation and deficit risks, the momentum behind the “Trump Trade” is undeniable, as there were far more buyers than sellers.
The Republicans have seized control of the U.S. Senate, reclaiming the chamber for the first time in four years—a power shift that hands the GOP a crucial foothold in Washington. With this victory, Republicans gain significant influence over shaping the new administration, from confirming Cabinet appointments to steering the future of the Supreme Court if a vacancy arises.

Meanwhile, control of the House of Representatives hangs in the balance, setting the stage for a high-stakes showdown in Washington—and on Wall Street. If Republicans secure the House, it could pave the way for a swift, rubber-stamp adoption of Trump’s economic agenda, packed with aggressive tax cuts and tariff hikes. Such a power alignment would give the GOP the muscle to fast-track sweeping policy changes, turning campaign promises into legislative action with far-reaching implications for markets and the economy.

In the lead-up to the election, prediction markets essentially had Trump in a strong position. But a last-minute wave of mixed polling—especially from sources like the Des Moines Register—stirred some late uncertainty. Yet, as the votes poured in, confidence in Trump’s policies reignited. Stocks surged, and traders moved quickly to hedge potential currency risks, bracing for a return to his "America First" agenda.

With the dollar surging, rates ticking higher, and stocks rallying on Trump’s emphatic win, markets are already charting a new course. But as the dust settles and the reality of Trump’s return takes shape, the question on every investor’s mind is: where will we head as we approach January 20, when the new administration officially takes office? For now, Wall Street is riding high on Trump’s victory, but another direction may unfold as policy details emerge in the coming weeks, particularly around the outlook for Fed policy.

The Federal Reserve is widely expected to roll out a 25-basis-point rate cut this Thursday, with another likely on deck for December. But as we head into 2025, the path forward could get a bit murky. Trump's proposed fiscal policies—with tax cuts and sweeping deregulation—are set to fuel growth, yet they also risk letting the inflation genie out of the bottle. If inflation starts heating up again, the Fed’s rate-cutting plans may hit a roadblock, forcing policymakers to rethink their easing strategy. It’s a delicate balance between stoking economic growth and keeping inflation in check, and 2025 could bring some unexpected twists.

The U.S. election results are set to reshape the economic landscape, especially if Republicans hold onto the House. Yet, the big question remains: how much of the campaign rhetoric will actually transform into policy reality? We can expect a strong tilt toward tax relief, which will likely boost growth—but that growth comes with trade-offs. Broad tariffs and persistent uncertainty are poised to weigh on the outlook, with a firmer U.S. dollar and rising bond yields adding pressure.

Expectations of ballooning budget deficits, increased inflation risks, and potentially less Fed easing than previously anticipated are driving these higher yields—all signposts that give stock market players reason for caution. The markets may cheer tax cuts, but the broader package, filled with trade challenges and more enormous deficits, could lead to some bumpy terrain ahead.

In summary, The ‘Trump trade’ burst into action, sending shockwaves through every corner of the financial markets. U.S. equity futures surged more than 2%, fueled by a significant rally in Tesla, building on yesterday’s substantial gains. Corporate credit spreads, already tight, squeezed even closer, while Treasuries took a hit as the 10-year yield rocketed 18 basis points to breach 4.45%. The yield curve continued its steepening trend, with the 2-year rate rising 9 basis points to 4.27%. Meanwhile, Bitcoin flirted with new highs, catching a wave of bullish FOMO momentum, and the U.S. dollar was broadly stronger, logging one of its most significant single-day moves in over a year.

Among the standout moves, the Mexican peso was hit hardest, sliding as much as 3% after Trump hinted at steep tariffs of at least 25% on Mexican imports. The Euro(-1.8 %) and China’s yuan (-1.4 %) also took it on the chin as Trump’s protectionist stance added weight to the U.S. currency. But one of the most telling signs? The spread between nominal Treasury yields and inflation-protected bonds widened, a clear sign that investors are already considering heightened inflation risks as they anticipate a more aggressive fiscal agenda.

In Asia’s currency markets, all eyes are locked on the Republicans’ bid for the House. A GOP sweep could set the stage for a major shift in trade policy, and the USD/JPY has already surged 2% as traders lean into this G-10 proxy for trade tensions. If Republicans clinch the House, expect the USD/CNH to climb even higher, with markets bracing for intensified U.S. trade measures under a red wave.

Meanwhile, the Bank of Japan is likely watching the yen’s sharp drop with unease. Despite the yen's rapid depreciation, a direct intervention appears unlikely against the backdrop of broad dollar strength. Ironically, a rising dollar isn’t exactly ideal for Trump either—it could complicate his trade ambitions by making U.S. exports pricier.