Will the Second 'Trump Shock' Come... Economic Direction Following the US Presidential Election

In the upcoming U.S. presidential election, the possibility of a contest between incumbent President Joe Biden and former President Donald Trump is highly anticipated, raising concerns that the 'Trump Shock' from eight years ago could be repeated. However, Bloomberg forecasted on the 21st (local time) that the same volatility as in 2016 is unlikely to occur.

If President Biden succeeds in his re-election bid, it is highly likely that he will continue the policy direction he has shown so far. Volatility is expected to be low. In contrast, former President Trump caused global financial markets to panic with his surprise victory in November 2016. During his term, he continued to shake global stock markets and exchange rates with policies such as America First and tariffs.

Former U.S. President Donald Trump [Photo by Yonhap News]

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Accordingly, Wall Street began analyzing the potential impact of a Trump victory early on. Unlike eight years ago, when he was not nominated as the Republican candidate until May, Trump is currently considered a leading contender within the Republican Party.

Daniel Tobon, Head of G10 FX Strategy at Citigroup Global Markets, said, "This time, the market will recognize and price in both possibilities," adding, "Volatility like that seen after the 2016 election is not expected."

Regarding bonds, Bloomberg analyzed that the impact depends on how much the policies proposed by former President Trump can alter market expectations for interest rate cuts. Taxes, regulations, and economic growth influence this. However, unlike in 2017 when Trump pursued a $1.5 trillion (approximately 2002 trillion KRW) tax cut, it is expected that no new tax cuts will be pushed this time. President Biden is also pursuing an expansionary fiscal policy with a large deficit. Gennady Goldberg, Head of U.S. Rates Strategy at TD Securities, said, "Both candidates will generate high levels of deficits."

Dominique Wilson and Vicki Chang, strategists at Goldman Sachs, wrote in a memo to clients that the Republicans are likely to control both the White House and Congress, which could lead the Federal Reserve (Fed) to be cautious about potential economic overheating, thereby raising bond yields.

Regarding the dollar outlook, a 'strong dollar' trend is expected if former President Trump wins. If Trump's pledge to impose an additional 10% tariff on all imports is realized, it could suppress imports and restrict dollar outflows, thereby increasing the dollar's value. Alan Ruskin, strategist at Deutsche Bank, stated, "The Trump effect is fundamentally positive for the dollar," adding, "It is negative for major currencies such as the euro, yuan, and Mexican peso."

Bloomberg reported, "The peso, which rebounded last year, fell about 2% after Trump's victory in the Iowa caucus," and added, "As the U.S. election approaches and a Trump victory is anticipated, the yuan is expected to face additional pressure." Furthermore, Deutsche Bank strategists forecasted in a memo to clients that even if the Fed cuts rates sharply, the dollar will remain at 2023 levels due to election-related considerations and increased volatility prompting demand for safe-haven assets.

Bloomberg analyzed that macroeconomic factors will take precedence over the election in the stock market. Bloomberg stated, "In early 2016, global stock markets were more unstable than now due to rising interest rates and oil oversupply. The 2015 yuan devaluation triggered a massive sell-off in Chinese stocks, and the 2016 Brexit vote delivered another shock," adding, "Nevertheless, the S&P 500 was on an upward trend and surged within two months after Trump's election." Joseph Salucci, Co-Head of Equity Trading at Themis Trading, said, "At this point, political forecasts and the market are not aligned."

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