With President-elect Donald Trump’s Inauguration Day not until late January, one investment executive believes a “lame duck” period has begun for global markets.
“The first reaction of the global market was to extend the so-called ‘Trump trades,’ which led to a stronger US dollar, higher US yields and stronger US stocks,” said Damien Buchet of Finisterre Capital.
But today, Buchet says, markets may have little to say, aside from key appointments and occasional statements from the president-elect.
The IOC noted that even before the post-election rebound, the market’s assessment of the outcome had been relatively muted compared to pre-election expectations.
“This may be explained by the hope of some dilution of the more radical proposals, as well as the fact that the implementation timetable could possibly be longer,” he said.
One of the key lessons of Trump’s first presidency, according to Buchet, is that the Republican’s position on major issues can change quickly, making “accurate pricing that much more difficult.”
Speaking about the period from now until Inauguration Day, he believes there is still a chance that the foreign exchange and interest rate markets will recover from their initial post-election weaknesses. .
“The absence of further negative market reactions in December could lead to some unwinding and short-selling covering until the end of the year,” he said.
“Ultimately, we will need to position our portfolios on Trump’s likely long-term policies, but the amount and momentum of those policies may be difficult to anticipate before January.”
Winners and losers in emerging markets
Buchet also pointed out that after the election, market bias clearly favored weakening emerging market currencies relative to the strengthening U.S. dollar, with declines ranging from 2.1 percent for the Chinese yuan to 3 percent. hundred for the Mexican peso.
“These losses, which build on market turmoil ahead of the election, suggest that further substantial currency depreciation may be limited in the near term,” he said.
“At the same time, emerging market credit spreads have followed the global tightening trend, primarily through passive tightening in the face of rising US yields, providing an opportunity to reduce exposure to securities overvalued or ‘specialized’ by Trump’s leverage.”
In contrast, frontier market debt has seen stable to positive price movements, driven by continued global demand for credit and higher yields.
And while the chief investment officer (CIO) believes emerging market debt could continue to perform reasonably well based on its fundamentals, given that many emerging markets are not in the front line of fire under the Trump administration , he said notable exceptions were going to happen. being countries like China and Mexico.
“Amid continued concerns over consumer spending and unfavorable economic conditions at home, we believe China will need to pursue additional stimulus measures over the coming months to cushion its own domestic slowdown as well as the impact of tariffs likely customs duties – what she should do. be among the first to face it after inauguration day,” the IOC said.
“We believe that anything short of a more compelling social safety net [which President Xi Jinping is notably against] or a “builder of last resort” initiative for the real estate sector may not create a lasting impact.
Buchet added that China could also choose to “weaponize” the yuan to thwart U.S. tariffs, but said the move was unlikely to be used before Jan. 20.
“We believe markets may still need to price in further yuan weakness in the coming months.”
Looking at emerging markets more generally, Buchet highlighted that many markets in the region are increasingly reluctant to cut rates in light of the recent strength of the US dollar, and that this is likely to continue given rising US yields and uncertainty over how the Federal Reserve will respond to the Trump administration’s economic policies.
“This could limit the growth prospects of emerging countries or encourage governments to adopt a more flexible fiscal policy. »
Ultimately, Buchet reiterated that the greatest uncertainty concerns the timing and scale of policy measures.
“We will not be able to assess the measures before early 2025 but, as always, the worst is never a sure outcome,” he said.
“Markets may take a ‘glass half full’ approach, hoping for dilution and procrastination of the most extreme measures, potentially extending any end-of-year rally into early January. We will have to wait until later, in 2025, before we can really comment on “Trumponomics,” he declared.
