As a little over a month has passed since the victory of the Republican candidate, D. Trump, in the US presidential elections, several evaluation elements have already materialized from which we can try to draw useful indications on the new course that will characterize the economy and therefore the financial markets, not only in the US.
The first beneficiary of the change of tenant in the White House turned out to be the dollar, which in a few sessions left behind the technical resistance level at 1.09 against the euro, to settle in the subsequent accumulation area between 1.05 and 1.06. This rapid appreciation of the greenback has partially surprised insiders, given that the new President, both during the election campaign and during his previous mandate, has never hidden his preference for a competitive exchange rate. But experience rightly edifies, and the global macroeconomic context has changed drastically in the last five years that have coincided with extraordinary events such as the pandemic and the invasion of Ukraine. Trump’s mantra, which is summed up in the slogan “Make America great again”, leaves little doubt that the economic strategy will be pro-growth, therefore characterized by an accommodating fiscal policy, as in the previous mandate, and by a more cautious monetary approach, precisely to compensate for any overheating of the economy favored by lower taxes and the expected administrative deregulation.
Therefore, the foreseeable increase in international capital flows towards the USA, attracted by renewed growth estimates and the change in expectations regarding the cost of money, which will likely fall to a lesser extent and more gradually than would have ensued in the case of a confirmation of the Democratic party candidate, easily explains the rise of the dollar. For the sake of accuracy of analysis, however, it must also be noted that the other item in the exchange rate, therefore the euro, is in a diametrically opposite situation, given that the economic stagnation of the EU, caused primarily by the continuation of the technical recession in Germany, is driving away foreign capital and will lead the ECB to accelerate the expected phase of reduction in the cost of money, increasing the yield spread with the opposite side of the Atlantic. Therefore, it does not seem out of place to hypothesize that in the coming months the greenback will make further, even significant, progress and return to parity with the European currency. Remaining in the currency sphere, only the yen and the pound present some element of support in the short term, while all the currencies of the countries that will suffer the application of the new US tariffs, such as Canada, Mexico, China and in general the entirety of emerging countries, are penalized. The dollar’s pace could be matched by the Swiss Franc, which despite the Swiss National Bank continuing to reduce the cost of money, is orientated to fall to pre-pandemic levels, thanks to the beneficial inflation dynamics, appears destined to position itself below the 0.90 handle against the euro in the first half of next year. The further appreciation of the dollar, however, has medium-term consequences for the stock markets, as it tends to reduce systemic liquidity in other economies that cannot loosen their monetary policy because they must protect the exchange rate of their currencies.
However, at least for the first half of 2025, the trend of equity prices will remain supported by the growth prospects of the US and the current generally accommodating monetary policy. The only real unknown on the table is the short-term dynamics of inflation in the United States, while the long-term trend is gradually and constantly decreasing, in the sense that a resurgence induced by contingent factors such as a strong surge in domestic consumption, or energy costs in relation to geoponic situations, could worry the new administration that would not hesitate to put pressure on the FED in a more restrictive sense, putting the Governor’s future in doubt. To quantify, one could hypothesize an annual, as well as historic, high of the S&P 500 index close to the 6200 level, now upon us, followed in the second half of January by a technical correction that would take into account various factors, such as the inauguration of the new President, now discounted by the index, the probable resurgence of inflation and, last but not least, the delineation underway of new strategic positioning in the Middle East which should also lead to decisive truces, if not the end of the conflicts in progress.
Nicola Bravetti Data Source: Bloomberg
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