Wall Street Counts the Cost of a 'Trump 2nd Term' Scenario... "Concerns Over Fiscal Deficit and Bond Market Turmoil"

Wall Street Reviews Trump Election Scenario
Dollar Strength and Bond Yield Rise Expected
Concerns Over 'Bond Spasm' Amid Expansionary Fiscal Policy Including Tax Cuts

With the New Hampshire primary, a key milestone in determining the Republican candidate for the upcoming U.S. presidential election in November, held on the 23rd (local time), Wall Street has begun seriously reviewing scenarios for a second Donald Trump administration. They are weighing the possibility that former President Trump will solidify his dominance in the Republican primary and win the presidential election, and are calculating the potential impact on the U.S. economy and asset markets. Some voices have also raised warnings that the launch of a second Trump administration could cause the fiscal deficit to balloon like a snowball, potentially triggering a 'tantrum' in the bond market.

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According to major foreign media on the 23rd (local time), TD Securities recently presented a base scenario in which former President Trump wins the presidential election and the Republican Party regains the majority in the Senate. They expect the House majority to shift from the Republican Party to the Democratic Party.

Gennady Goldberg, TD Securities' U.S. interest rate strategy chief, analyzed, "Historically, if economic conditions improve, President Joe Biden's chances of re-election increase, but non-economic factors and persistently high inflation could work in favor of former President Trump." He added, "With Trump's victory and a divided Congress, the 10-year Treasury yield is likely to rise further," and forecasted, "Stocks could rise on expectations that corporate taxes will remain low."

Goldman Sachs also analyzed the market impact of former President Trump's election in a recent investor memo. The firm stated, "The 2024 U.S. presidential election could potentially be a significant market event," and predicted that the launch of a second Trump administration would push up the dollar's value and bond yields.

According to Goldman Sachs' analysis, in the 13 hours following the start of the Republican Party's first primary, the Iowa Caucus, at 7 p.m. on the 15th, the dollar showed strength against other major currencies. Goldman Sachs diagnosed this as an unusual level of volatility beyond normal levels. Dominic Wilson, senior advisor of Goldman Sachs' Global Market Research Group, said in this regard, "This suggests that former President Trump's trade and global policies could further increase the dollar's value."

Earlier, Jamie Dimon, CEO of JP Morgan, known as the "Emperor of Wall Street," also mentioned former President Trump at the World Economic Forum (WEF, Davos Forum) held in Switzerland on the 17th. He praised the economic, tax, and immigration policies of the Trump administration and remarked that if the Democratic Party does not show more respect to Trump's supporters, it could damage President Biden's re-election challenge, drawing attention.

As Wall Street begins to examine the scenario of a second Trump administration, some concerns have also emerged that former President Trump's election could cause significant shocks to the bond market and financial markets.

Guillermo Felice, senior global investment strategist at U.S. asset management firm PGIM, pointed out, "The market is reacting rather complacently to risks associated with former President Trump's victory, such as fiscal expansion policies like tax cuts or increased defense spending, and heightened military conflicts," adding, "The risk of the U.S. fiscal deficit is a very important issue that the market will have to face again."

Former President Trump lowered the corporate tax rate from 35% to 21% in 2017 and plans to reduce it further to 15%. This tax-cutting stance could further expand the chronic U.S. fiscal deficit and increase U.S. Treasury issuance to a 'supply bomb' level, potentially causing bond prices to fall significantly. Felice forecasts that both risky assets, including stocks, and safe assets like bonds could face a much more difficult year than last year.

Additionally, he expects that the radical shifts in foreign policy, such as a 10 percentage point increase in tariffs on all imported goods and issues related to Russia and North Korea, promoted by former President Trump, will exacerbate market turmoil.

CNBC reported, "While the market mostly focuses on short-term economic data and what it means for the Federal Reserve's interest rate cut path this year, experts are looking ahead to the November election and beyond through fiscal and geopolitical analysis."

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