President-elect Donald J. Trump promised a slew of new initiatives and policy announcements as soon as he takes office following his January 20 inauguration. In its latest quarterly outlook, Saxo Bank said that global markets will spend the first quarter of 2025 in reaction mode, even well before the impacts and knock-on effects of the Trump agenda are known.
Many of the key Trump 2.0 initiatives, from taxation and deregulation to fiscal policy, will likely not fully crystalize until fiscal year 2026. However, markets will do their level best to look ahead and are likely to trade with considerable volatility as the world adjusts to a more forceful U.S. policy mix that stimulates a varied response domestically and especially in the wider world.
Global equities record remarkable gains in 2024
Markets initially reacted positively to the strong Trump victory and Republican sweep of Congress in a similar fashion to the 2016 election. The U.S. dollar rallied, U.S. yields shot higher and U.S. equities rallied broadly. But by year-end, while U.S. yields and the big dollar remained firm, the broad stock market reaction, as measured by the equal weight S&P 500 Index, traded about 2 percent below election day levels.
Saxo Bank attributed this decline to concerns regarding the Trump 2.0 agenda which includes multiple policy contradictions and uncertainties. The decline was also due to the Fed’s hawkish guidance at the December 18 FOMC meeting, as it didn’t want to pre-commit to much further easing based on the same uncertainties in the outlook the market is grappling with.
Despite market uncertainty, 2024 was a remarkable year for global equities, which mostly means U.S. equities, as the latter make up as much as 70 percent of the MSCI World index. This is an incredibly concentrated index now with so much of its exposure to the U.S. mega-caps. The top 20 U.S. stocks by market cap now make up around 40 percent of this index. Elsewhere, the strong U.S. dollar limited emerging market gains in 2024, but Europe was the real laggard despite a respectable performance in EUR terms for the year for the MSCI Europe index.
Trump agenda’s goals are inherently contradictory
The Trump agenda aims to reindustrialize the U.S. to both bring back manufacturing jobs and improve national security, which the pandemic made clear includes critical industrial supply chains. At the same time, the aim is to improve the country’s massive trade and budget deficits and overall spiraling debt trajectory while keeping inflation low.
John Hardy, chief macro strategist at Saxo Bank says that these goals are inherently contradictory outside of some miraculous productivity and real growth miracle. Trump hopes that most of the above agenda is achievable and paid for by tariffs and economic growth.
U.S. Treasury Secretary nominee Scott Bessent has proposed a “3-3-3 plan” to deliver the Trump agenda. The plan includes a chop to the fiscal deficit of 3 percent of GDP from more than twice that in recent years, real GDP growth of 3 percent delivered via deregulation and tax cuts, and low inflation via an additional 3 million barrels a day “equivalent” growth in US oil/gas production.
“More likely, we’ll see half that amount of growth or less because any fiscal slowdown by definition will subtract from overall GDP growth. After all, it was the Biden deficits that drove much of the U.S. growth out-performance relative to the rest of the world in the last two years, preventing that pandemic-hangover U.S. recession that just never seemed to arrive,” added Hardy.
Consensus U.S. GDP growth forecasts for 2025 are at +2.1 percent, a rosy forecast given the risks, added Saxo Bank.
U.S. Treasury yields rise
U.S. Treasury yields rose all along the yield curve ahead of Trump’s inauguration as the market made the general assessment that the new president will bring some combination of sticky inflation and still very large budget deficits, and even solid economic growth as well. Current forecasts put the 2025 U.S. treasury debt service bill at a net $1 trillion, up from less than $900 billion in 2024 and $650 billion in 2023.
Saxo Bank says that the only scenario that can cap longer U.S. treasury yields through organic market forces might be a recession amidst massive DOGE fiscal spending cuts and a flight out of risky assets. Even so, such a recession would eventually worsen the deficit/debt trajectory and inevitably spark a fresh combination of new Fed QE and politically obligatory fiscal stimulus to come hot on its heels.
“Either way, all paths require that over the medium to longer term, nominal U.S. GDP rises faster than the average interest rate at which the US treasury issues debt,” added Hardy.
Read: A pivotal year for progress
Global markets under Trump 2.0
For the U.S.-China relationship under Presidents Trump and Xi, the potential outcomes are incredibly diverse. Saxo Bank expects Trump to open with targeted tariffs with the promise of more to come but with an invitation for deal-making. At the same time, with or without some grand bargain on U.S.-China trade and currency policies, perhaps even a full “Mar-a-lago accord”, China needs to reflate its economy.
As for Europe, the continent has one distinct advantage relative to most of the rest of the world. Things are already so bad for core Europe that they may have a hard time getting any worse, at least for the traditional two key large core Eurozone powers, France and Germany.
France is the currently Eurozone’s softest spot. The French fiscal stability concerns are sufficiently stark that in the first trading days of 2025, French 10-year yields rose above Greek 10-year yields for the first time ever.
Meanwhile, Germany offers considerable upside potential after the coming February 23 election. Germany will need productivity growth, especially through lower energy prices, deregulation and increased investment in infrastructure and opening up for innovation.
However, the one big wild card for Europe is the potential for euro-bond issuance at the Eurozone level to fund massive new national security investments, secure long-term cheaper energy supplies and enhance trans-European infrastructure and supply chains.
