Trump is Back!

The macro point

The European Central Bank (ECB) is making its comeback this week. If you’re expecting it to unveil a schedule for rate cuts, you’re going to be disappointed. As in previous weeks, the ECB is expected to send mixed signals and leave doubt hanging over the timing of the first cut.

2024 is an intense election year. As expected, former President Donald Trump has largely won the Iowa caucus, the first stage of the Republican primary (51% of the votes). He confirms his status as a favorite. Barring any last-minute surprises (notably in the event of ineligibility decided by the courts), Trump is expected to be the Republican Party’s candidate in the presidential election next November 5 against incumbent President Joe Biden. According to a majority of analysts, this is bad news. In a report published last week, Commerzbank warned against a challenge to the independence of several American institutions, including the Federal Reserve (Fed), in the event of a Republican victory. It goes without saying, according to the German bank, this would be negative for dollar-denominated assets (stocks and bonds topping the list). Important point: for now, the candidate has never mentioned this possibility. He does not plan to take control of monetary policy by political means. So, it seems as though the market is playing with fear.

Let’s analyze the main lines of his program to see more clearly. On one hand, there are the measures that are difficult or even impossible to implement. For example, he plans to create ten “freedom cities” the size of Washington (177.0 km², or more than one and a half times the area of Paris) where “we will go to the office in flying cars.” This is the mobility aspect. He is also confident in his ability to end the war between Ukraine and Russia in “24 hours.” That’s optimistic. On the other hand, there are measures more likely to be implemented, particularly the economic protectionism aspect. He wants a universal tariff of 10% on all products imported into the United States and the elimination over a four-year period of Chinese imports of electronics, steel, and pharmaceutical products. All this could lead to an intensification of the trade war. One can easily imagine that countries subjected to a universal tariff of 10% may decide on retaliatory measures. If this is the case, Trump has threatened to escalate further by increasing customs tariffs even more... In short, it can be endless. What history has taught us is that high tariffs are negative for growth because they reduce trade, lead to a revival of inflation, and harm consumption. But it is obviously more complex. Tariffs can also encourage Ricardian relocations (based on a comparative advantage) in the countries where the goods produced are sold. This can be done through subsidies. It is somewhat what the United States is doing with the semiconductor sector. In order to reduce the sector’s dependence on China and a possible intensification of the trade war, Washington has subsidized the relocation of factories on American soil by putting billions of dollars on the table. It’s effective. As we can see, economic protectionism is not necessarily bad.

What about currencies? The consensus sees a resurgence of protectionism as synonymous with a decline in the dollar. Again, it’s not so simple. The evolution of the greenback will depend on many other parameters, such as the amplitude of the Fed’s rate cut cycle and how expansionist the US fiscal policy will be. These are two factors that certainly have more importance on the dollar’s performance in the medium term than a possible Trump victory. For us, the return of the Republican to the White House should mainly increase volatility in the foreign exchange market. In reaction to the controversies launched by Trump, we could see abrupt movements on the dollar, and potentially on the euro and the yuan. All this against a backdrop of already high geopolitical risk, stalled global growth, and trade routes we thought were safe but ultimately are not. In itself, this is already conducive to the return of volatility.

Technical point

Announcements to follow