TRUMPENOMICS
With the US presidential race in full swing, polls are indicating that Donald Trump will likely win a second term, and the world is bracing for the effects his second presidency may have.
THIS WEEK’S KEY THEMES:
- Trump remains a global disruptor
- S&P 500 and Nasdaq face worst day since 2022
- Brent crude hovers at its lowest level in seven weeks
- Sterling trades near one-year highs
POTENTIAL IMPLICATIONS OF A TRUMP VICTORY
With the possibility that Donald Trump may secure another term as President of the United States (US), it is essential to explore how a second Trump presidency could differ from his previous tenure, and what the ramifications may be for the US economy, as well as the global markets.
A COMPARATIVE OVERVIEW: TRUMP 1.0 VERSUS TRUMP 2.0
FIRST TERM HIGHLIGHTS (2017 TO 2021)
Tax reforms: The Tax Cuts and Jobs Act of 2017 reduced corporate tax rates from 35% to 21%, aiming to spur investment and growth.
Deregulation: Trump’s administration focused on rolling back numerous regulations, particularly in the energy, environmental, and financial sectors.
Trade policies: A hallmark of Trump’s first term was a more protectionist trade stance, characterised by tariffs on Chinese goods and renegotiating trade agreements like the North American Free Trade Agreement (NAFTA), now the United States-Mexico-Canada Agreement (USMCA).
Immigration policies: Stricter immigration controls, including travel bans and reduced legal immigration, were central themes.
Healthcare: Efforts to repeal and replace the Affordable Care Act were prominent but met with mixed success.
POTENTIAL NEW TERM POLICIES (2024 TO 2028)
Further tax reforms: Trump may push for additional tax cuts, potentially targeting middle-class taxpayers and further reducing capital gains taxes.
Aggressive trade policies: The likely continuation and possible escalation of the trade war with China, with more tariffs and stricter trade deals.
Infrastructure spending: Potential for increased infrastructure investment to stimulate economic growth and job creation.
Continued deregulation: Further reductions in regulatory oversight, particularly in energy and finance, aiming to foster business-friendly environments.
Immigration reform: Continuation of strict immigration policies, possibly with more focus on merit-based immigration systems.
ECONOMIC IMPLICATIONS FOR THE US
DOMESTIC ECONOMY
Growth and investment: Tax cuts and deregulation could boost economic growth and business investment in the short term. However, the long-term effects include increased deficits and increased national debt.
Inflation and interest rates: Increased spending and investment, as well as high tariffs on imported goods, could lead to higher inflation, prompting the US Federal Reserve (Fed) to raise interest rates.
Labour market: Stricter immigration policies could lead to labour shortages in specific industries, potentially increasing wages, and business operational costs.
SECTORAL IMPACTS
Technology and manufacturing: Could see positive impacts from tax incentives and deregulation but may face challenges from trade tensions.
Energy sector: Could benefit from deregulation and potential new projects in fossil fuels but will face global pressure to transition to cleaner energy sources.
Healthcare: Could face continued uncertainty and potential disruptions if attempts to dismantle the Affordable Care Act persist.
GLOBAL ECONOMIC EFFECTS
TRADE AND INTERNATIONAL RELATIONS
Global trade tensions: Heightened trade tensions with China and possibly other countries could disrupt global supply chains, increasing the cost of trade and market volatility.
Geopolitical risks: An aggressive stance on international relations may increase geopolitical instability, affecting global markets and investor confidence.
ALLIED AND EMERGING ECONOMIES
Europe and Asia: Allies might face economic pressures from altered trade agreements and tariffs, while emerging economies could experience challenges from shifting US policies and a potential reduction in risk appetite.
Global financial markets: There may be a continued increase in volatility and uncertainty in global financial markets, with potential shifts in capital flows and investment strategies.
A second Trump term could significantly change the US and global economies. While there may be short-term gains from tax cuts and deregulation, the long-term implications include potential increases in the US’s national debt, US inflation, and global market volatility. The heightened trade tensions and stricter immigration policies could also reshape the labour market and international economic relations, influencing the broader financial landscape for years to come. As the world watches the US electoral outcomes, the anticipation of Trump’s economic strategies will shape investor sentiment and global economic forecasts.
DIVING INTO THE MARKETS
BOND YIELDS HOLD STEADY
The yield on US 10-year Treasury notes remained at the 4.2% mark on Thursday, maintaining their steep decline, despite robust economic indicators from the Bureau of Economic Analysis. The US gross domestic product (GDP) grew at an annualised rate of 2.8% in the second quarter, a significant increase from 1.4% in the previous period. US consumer spending and underlying price estimates also surpassed expectations. However, the market is still fully pricing in a Fed interest rate cut in September, influenced by a drop in durable goods orders in June.
In the United Kingdom (UK), the 10-year Gilt yield stood at 4.14%, while South Africa’s R2030 government bond yield hovered around 9.8% in late July, up slightly from 9.66% earlier in the month, but below the double-digit levels seen before the general election. While the South African Reserve Bank (SARB) kept interest rates steady at a 15-year high last week, aligning with market expectations, investors anticipate a 25-basis points interest rate cut in September, with some expecting a more significant 50 basis point reduction.
EQUITY MARKETS IN THE RED
On Thursday, the major US stock indices exhibited volatility. Both the S&P 500 and the Nasdaq experienced their worst sessions since 2022 the previous day, as traders processed corporate earnings and key economic data. The US’s 2.8% GDP growth in the second quarter provided some relief regarding economic resilience, despite US growth remaining below the levels seen in late 2023. Easing price pressures, however, reinforced expectations of a Fed rate cut in September. The tech sector lagged, with chip and semiconductor firms, Nvidia and AMD, experiencing declines, while consumer staples performed well. Notably, automotive manufacturer, Ford, and diversified manufacturing and technology company, Honeywell’s shares dropped due to disappointing earnings and lower profit guidance, while aerospace and defence conglomerate, Raytheon Technologies, saw a significant increase after surpassing earnings and revenue estimates.
In the UK, the FTSE 100 fell by over 0.5% to a three-month low on Thursday, influenced by weak corporate earnings and a bleak global stock market outlook following substantial losses on Wall Street. Despite global biopharmaceutical company, AstraZeneca’s positive earnings and forecast upgrades, its shares declined by over 2%. Financial services group, Lloyds, also saw a drop despite exceeding profit expectations. In the FTSE 250, TV content producer, ITV’s shares decreased by 5% due to missed revenue projections, while global consumer goods company, Unilever’s shares surged by nearly 6%.
Germany’s DAX index fell by 1.2% to around 18,165, its lowest level in over a month, amid a global tech rout and fresh corporate results. Major decliners included semiconductor manufacturer, Infineon, energy technology company, Siemens Energy, and banking firm, Deutsche Bank. The auto sector was also under pressure following disappointing results from automotive manufacturers, Stellantis and Renault. Economic data revealed an unexpected decline in the ifo Business Climate Index, reflecting increasing pessimism about Germany’s economy.
The JSE index in South Africa dropped by 1.3% on Thursday, nearing the 79,500 mark and reaching a three-week low due to disappointing global corporate earnings reports. Major decliners included global consumer internet group, Naspers, luxury goods brand, Richemont, and companies in the mining sector like AngloGold Ashanti, Gold Fields, and Anglo-American Platinum, whose parent company also faced a $1.6 billion write-down on its British fertilizer project.
CHINESE DEMAND CONCERNS WEIGH ON OIL
Brent crude oil futures fell to $80.50/barrel on Thursday, their lowest level in seven weeks, primarily due to weak Chinese demand overshadowing positive US inventory data. Concerns about declining Chinese oil imports and refinery activity weighed on the market, alongside advancing ceasefire talks between Israel and Hamas. However, stronger-than-expected US economic growth in the second quarter and a significant drop in US crude and gasoline inventories provided some support.
Gold prices traded at $2,365/ounce on Thursday, their lowest level in two weeks, after shedding 1.3% during Thursday’s local trading session amidst data indicating the US economy’s resilience despite restrictive monetary policies. The US second quarter GDP print of 2.8%, exceeded expectations. Increased physical demand from India, following a reduction in gold import taxes, however, provided some support.
CURRENCIES FACE VOLATILITY
The US Dollar Index hovered around 104.4 on Thursday as traders digested key economic data. The US economy’s faster-than-expected second-quarter growth, coupled with easing price pressures and steady initial jobless claims, kept the odds for a September rate cut near certain. The dollar weakened against the Japanese yen and Swiss franc but strengthened against the Australian dollar and other commodity-linked currencies.
The euro declined to $1.083/€, further distancing from the four-month high of $1.094/€ reached on 17 July. Weak Purchasing Managers’ Index (PMI) data for the eurozone, Germany, and France raised expectations for additional European Central Bank (ECB) rate cuts. The flash PMIs indicated stagnation in private sector activity, with significant contractions in manufacturing and a slowdown in services, particularly in Germany and France. Consequently, traders increased their bets, that there will be two more rate cuts by the ECB this year, to 90%.
The British pound hovered around $1.30/£, near one-year highs, as traders scaled back expectations of a Bank of England (BoE) rate cut in August following the latest economic data. The UK’s inflation rate steadied at 2% in June, above forecasts, with services inflation remaining high. This reduced the likelihood of an August rate cut to 33%, down from 49% before the release of the UK Consumer Price Index. While the UK wage growth slowed, it remained elevated, and the unemployment rate held steady.
The South African rand traded around R18.40/$ on Thursday, as commodity-linked currencies came under pressure amid Chinese demand woes and broader global risk-off sentiment.
Key Indicators:
USD/ZAR 18.27
EUR/ZAR 19.83
GBP/ZAR 23.50
Gold: $2,370.90
Brent Crude: $82.48
