The eyes of the markets are on Trump – and a reaction is already evident on the ground

“Trump is returning to the White House, and I really don’t have the energy for it. True, he has a pro-business attitude and overall his policies are good for the markets. But I remember the previous term, when the first thing I would do in the morning was go on Twitter and check what he tweeted about and what it did to the market,” a senior official at one of the investment houses in Israel told Globes.

President-elect Donald Trump used Twitter (now the X Network) to announce new tariffs or sometimes to bash a particular company or industry. For example, in March 2017 he promised to open the pharmaceutical market and encourage competition. “The price for Americans has gone down a lot,” Trump tweeted. As a result, there was a sharp drop in pharmaceutical stocks in New York and even in Tel Aviv.

Although he has yet to officially return to the Oval Office, memories of that time have surfaced more strongly in the past week. On Monday, the Washington Post reported that Trump may backtrack to some extent on his promises regarding the aggressive tariff policy. In response, the dollar weakened and some countries breathed a sigh of relief. It didn’t last long.

Two days passed, and CNN reported that the president-elect was considering declaring a “national economic emergency” to allow for a new tariff plan. This was enough to produce the opposite picture, to bounce the dollar and further stress the European continent. “Anyone who has been following the affairs knows that this is not new,” explains a source in the market. “This is his way to raise tariffs – to declare a ‘state of emergency’. Otherwise he has no legal way to violate an existing trade agreement.” So what causes the volatility? The uncertainty regarding the policies that Trump will lead is so great that every report jumps the markets.

Will he impose aggressive tariffs or will he be flexible?

What will the president-elect really do when he enters the White House? This is the billion-dollar question that preoccupies investment managers and economists all over the world. Among other things, on the agenda: the imposition of a minimum tariff of 10%-20% on all imported goods, with an emphasis on China. There, the duty may reach 60% or more. In addition, Trump threatens 25% tariffs on goods from Canada and Mexico.

However, Bloomberg describes that there are significant divisions within Trump’s transition team. While some support the imposition of blanket tariffs, others favor a more targeted approach on strategic industries or one that would exclude countries with existing trade agreements. In his first term, Trump expressed flexibility and willingness to change his positions according to circumstances and market reactions.

In the forecasts of all the major financial bodies for the current year, this issue gained prominence. In the international rating company S&P, for example, they wrote that “the fiscal, trade and immigration policies of the incoming American administration will have significant consequences at the global level considering the size of the American economy. The global macroeconomic forecast is a hostage to the implementation of the policies of the new American administration.”

J.P. Morgan, Goldman Sachs and other financial bodies also described the issue of tariffs that Trump would impose as a fundamental question mark. In Bank of America’s latest fund manager survey, the two biggest “extreme risks” to global markets cited were “a global trade war leading to a recession” and “inflation prompting the Fed to raise interest rates.”

The markets remember the first term well

Until the picture becomes clear, the markets are moving in volatility and even the US central bank is sitting on the fence. Only last September, Fed members surprised when they cut interest rates by half a percentage point (from 5.5% to 5%) and Chairman Jerome Powell emphasized the importance of supporting the labor market in light of the drop in inflation. Since then, interest rates have fallen moderately two more times, But Powell sounded quite different. In his press conference after the latest interest rate decision on December 18, he compared the current situation to “driving on a foggy night or walking into a dark room.” Full of furniture. Just slow down.”

Although the minutes of that meeting were released in full this week without mentioning Trump by name, the summary of the meeting included at least four references to the implications of changes in immigration and trade policy on the American economy that the president-elect may make. “Almost all participants estimated that the upside risks to the inflation forecast have increased,” the minutes read. There, too, the “uncertainty” is mentioned in detail. That’s the name of the game right now.

“Ahead of Trump’s entry into the White House, the members of the Fed hardened their positions and the message is that the inflation risk is increasing,” says Gat Magido, partner and CEO of the investment house Finsa Capital. attention”.

Despite the far-reaching measures that Trump has promised to take, the president-elect is still loved by the markets. After the elections, the American stock market jumped sharply and it still shows a positive balance since then, despite the volatility. “With major policy changes on the horizon, the markets should be prepared for much more volatility going forward,” a senior economist at Deutsche Bank noted this week. One of the possibilities for the paradox between the support given by the markets to Trump and the uncertainty he creates, is memories of his first term – his first year in the White House ended with the S&P 500 rising by 19%. However, it should be noted that this was a different period: inflation was then under control and the interest rate was low and stable.

The run of the dollar and the worry in the bond market

Beyond the volatility in the stock market, there are also tensions in bonds and foreign exchange. Since the US elections, the US dollar has soared to a more than two-year high against the basket of currencies and is taking giant steps closer to parity against the euro. The influx of investors into the US currency is trivial in times of crisis, as it is considered a “safe haven”. A similar trend was also seen in the end 2016, after Trump was elected on the “America First” ticket and his promises to strengthen the economy and domestic industry. A slight sense of déjà vu. This time, what supports the US currency is the expectation that Trump will implement his tariff plans.

The American bond market is also showing signs of uncertainty. The government’s 10-year bond yield stands at 4.6%. These are record levels for 8 months, but this is a relatively unusual figure at a time when the Fed is starting to lower interest rates. Usually, when the central bank lowers interest rates, bond yields fall accordingly, since the interest rate directly affects the cost of money in the economy and its reduction is intended to support economic activity. The government’s 10-year bond is at high levels, and the market is hardly pricing in interest rate cuts in the coming year. This increases the risk due to the government’s debt level and financing costs,” she says Megido from Pinsa Capital.

So why is a reverse trend happening now? One of the explanations for this is the huge US debt, which has reached a peak of $36 trillion and the government’s swelling deficit. Another reason is the inflationary effect that Trump’s tariff policy may have in the long term. Thus, while the Fed is lowering interest rates to support the economy, the market is actually pricing in concerns from the “overheating” of the economy under the new administration. The current figure – a return of 4.6% – largely expresses a statement of The markets in the existing situation of protectionism and deficits – there is not much room for a drop in interest rates.

The coming months, Magido explains, will be a test for the American economy. “I recommend closely monitoring the employment market and the development of inflation. For two years now, investors have been waiting for a slowdown in the US economy that has not arrived, but this year it is certainly likely that there will be one, due to a decrease in consumer savings, an increase in consumer credit arrears and the high cost of mortgages. In addition, Trump’s efficiency policy should support the weakening of the employment market, perhaps even significantly. Such an environment is expected to change the tone of the central bank and the markets and drive a decrease in yields throughout the curve.”

Bottom line, we have to wait for Trump to settle in the Oval Office. Will the promises of aggressive policies shake the economy and the markets, or is it just a negotiating tactic of a seasoned businessman? We will get the answer to that very soon.