US elections outcome – ‘inflation outlook could deteriorate significantly’

Commenting on the market reaction to the US election outcome including currency markets, global trade and investment flows and the geopolitical landscape, Chris Metcalfe said:

“In the short term, the market reaction to Trump’s return to the presidency will likely be positive but volatile. However, further down the line, I believe the inflation outlook could deteriorate significantly if he follows through on his promised tax cuts and economic policies. While a Harris victory would have posed its own inflationary risks, those would have stemmed from factors such as increased government spending and regulatory changes.

“We’ve already seen some initial reactions in the currency markets following the news of a Trump presidency. While sterling is falling against the US dollar, the pound is appreciating against both the yen and the euro, suggesting that investors are positioning themselves based on expectations of potential trade disruptions.

“Additionally, Trump says he has a preference for a weaker dollar, which would have profound implications for global trade and investment flows. Still, unlike economic policy, markets largely dictate currency moves and will be out of his control. Overall, the environment will likely become more contentious, and the gloves may come off in the ongoing trade wars.

“Furthermore, the European Union faces a considerable challenge in managing trade tariffs effectively. A Trump presidency may embolden populist parties across Europe, potentially leading to a rise in protectionist policies. This would intensify trade wars and create further uncertainty in the global economic landscape.

“One key aspect we must consider is China’s response to a Trump presidency, which remains uncertain. China has various options available to it, and their strategy will be critical in shaping global market dynamics. I think it would be a mistake to expect the market reactions of the next couple of weeks to continue to play out for the rest of his presidency. As a Trump America becomes more isolationist and further dismantles the globalisation narrative, new relationships will be forged between countries and economic blocks, and it is too early to say how that will look.”

 
Chris Metcalfe is Chief Investment Officer, IBOSS, part of Kingswood Group