Tariffs, TACO, and the dollar: global markets in the year of Trump 2.0
A year since the election of Donald Trump as US president, global financial markets have had to deal with unprecedented policy shocks and uncertainty as well as high volatility, with stocks, gold and crypto hitting record highs.
After Trump defeated Democratic rival Kamala Harris on November 5, 2024, the dollar surged higher, along with stocks and bitcoin, while Treasury yields rose, as investors priced in the possibility of greater stress on US finances.
Since then, the US government has reached trade deals, while improving global supply chains and post-war international diplomacy for decades.
Investors are learning to navigate this uncertainty, including a clear way to overcome Trump’s tendency to raise threats but then back down. The so-called TACO trade – “Trump is always afraid” – has become a thing.
Here’s a look at the current state of major markets, compared to when Trump was elected.
UP A LITTLE, DOWN GREEN
The dollar has provided the clearest reflection of how the rest of the world is reacting to Trump’s erratic approach. Its value soared after the election, as investors bought into the idea that the Trump-fueled spending spree would boost the economy, but its net value has lost 4% since then.
Trump’s tariffs on trading partners and uncertainty about their impact have prompted investors to look for alternatives. His crypto-friendly policies, which have drawn attention to unprecedented conflicts of interest, sent bitcoin BTCUSD to a record high of $125,835.92 in October. Geopolitical tensions and tariffs have also pushed gold, a classic safe-haven asset, to a record $4,381 an ounce in October.
Demand for the dollar is unlikely to wane any time soon because when financial market or geopolitical turmoil heats up, the dollar is often investors’ first choice, or “dirtiest shirt,” as Piotr Matys, senior FX analyst at In Touch Capital Markets, puts it.
CHECK STOCK
Stock markets everywhere have hit record highs this year, driven in large part by enthusiasm for artificial intelligence and the prospect of falling global interest rates.
Trump’s tariff announcement on April 2, “Liberation Day,” was the first big test and it hit markets hard. The MSCI World Index EURONEXT:IACWI plunged 10%, but recovered to a record high, up more than 20% since Election Day.
The S&P 500 SPX is up 17% since last November, thanks to AI fever, while in Europe, defense stocks are at the center of the rally, as Trump forces regional governments to spend more money on their own security, while the war rages in Ukraine. A technology-fueled rally and a weaker dollar have boosted equities in Japan, South Korea and China as well.
TESLA – ELECTRIC YO-YO
Trump’s relationship with Elon Musk, the world’s richest man, was a major driver of Tesla shares in the weeks after the election. Musk spent more than $250 million to support Trump’s re-election bid last year and even joined his campaign.
Musk’s wealth swelled, as shares of his electric vehicle maker nearly doubled in less than two months to a record high of $488.5.
But the honeymoon didn’t last long. After Musk launched Trump’s budget-cutting Department of Government Efficiency (DOGE) in January, Tesla’s brand loyalty levels plummeted as the CEO’s flirtation with politics scared away buyers, contributing to two consecutive quarters of declining deliveries.
Tesla shares bottomed in April before rebounding as tensions between Musk and Trump flared, culminating in a split in late May.
Despite the turmoil, the world’s most valuable automaker has outperformed rivals, including GM Detroit, Ford F and Stellantis STLAM.
Bond Yields Rise
Since Trump’s election, bond yields have surged in major economies, reflecting investors’ concerns about rising government borrowing and the sustainability of public finances.
One concern among investors in the US Treasury is the possible cost of funding Trump’s planned tax cuts. His “One Big Beautiful Bill,” passed in July, is expected to increase the federal deficit by about $3.8 trillion over the next 10 years.
However, with the Federal Reserve lowering interest rates and inflation seemingly under control, the 30-year Treasury yield has only risen 14 basis points to 4.66% since last November.
The rise in Japanese government bonds (JGB) was more aggressive, with 30-year yields rising nearly 85 basis points to a record high while French and German 30-year yields rose 62 and 59 bps, respectively, since November 5, 2024.
BALANCING TRADE
One of Trump’s main areas of focus is the US trade balance, which he says is proof that America is being “cheated” by its partner countries and that tariffs, besides being “the most beautiful word in the dictionary” are the only way to fix it.
Trump’s tariffs have raised the cost of doing business and made planning more complicated. However, this eroded the trade deficit. The latest data shows the country hit a two-year low of $60.2 billion in June, and the deficit with China shrank by 70% in five months to its lowest level in more than 21 years.
Likewise, the US-EU trade balance surged ahead of the tariff announcement before declining. This suggests that “the trade war may hurt the EU more than China,” which has stronger contingency plans than Europe, said Ipek Ozkardeskaya, senior analyst at Swissquote.
Source: Reuters
