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How might ‘Trump Trades’ play out in the year ahead?
With Trump’s inauguration imminent, Russel Matthews, Senior Portfolio Manager for Global Macro, looks at how the Republican policy framework could pan out, and the potential impact on macro markets.
Key takeaways
- ‘Trump Trades’ have played out in spectacular fashion over recent months.
- We await the contours of tariff and tax policies, following much noise.
- Being short US rates and long the dollar has paid off handsomely.
- However, the valuation proposition in these trades is much less obvious than last year.
President-elect, Donald Trump, has already had a dramatic impact on financial markets. Despite the Fed cutting interest rates by 100bps in the second half of 2024, from 5.50% to 4.50%, bond and money markets have gone the other way. At the start of October, the market was pricing -125bps of rate cuts in 2025 yet, as we write, the expectation is for only one cut (-0.25%) this year1.
Moves in longer dated US Treasury yields have been of a similar magnitude; the 10-year maturity is 100bps higher and closing in on 5%. Currency markets have also moved materially over this period, with the US dollar index nearly 10% higher since the end of October. Some of these moves can be put down to increased evidence of US growth exceptionalism. Nevertheless, we can say with some conviction that ‘Trump Trades’ have played out in spectacular fashion.
Yet, what have we have learned since November to give us a steer on how the policy framework is going to pan out, and what impact this will have on macro markets going forward?
At this stage, before Trump has even had a chance to get his feet under the Resolute desk in the Oval Office, it is somewhat of a fool’s errand to try and be too specific on how things are going to pan out over the next six months. Indeed, there is too much uncertainty and Trump is too erratic.
That said, we are simply guided by an old maxim, “Take Trump seriously, but not literally”. Taking Trump seriously means factoring reasons for his resounding win in November, including the extent to which how seriously disillusioned and disgruntled middle America is with the political and social status quo in the US.
What is clear is that Trump’s base wants red meat. They want to see serious disruption, particularly with regards to economic policy, border security, and immigration policy. We think he will be inclined to give them what they want.
While Trump will continue come up with outrageous and contradictory rhetoric (calling out Canada as the 51st US state and threatening to take over the Panama Canal), this is noise and smoke designed to excite the base and annoy his opponents. Not much of this has substance. The bigger deal is how explosive the contours of his actual tariff and tax policies will be.
So, what does this mean for our macro strategy? The last quarter of 2024 and the beginning of January have played out much as we expected. The ‘Trump Trade’ has been relatively simple, get short of US rates and long of the US dollar. Both these strategies have paid off handsomely.
However, as we come much closer to the actual event of Trump’s inauguration and the moment when we should start to get more concrete detail on the policy mix, the valuation proposition in both these broad macro trades is much less obvious than it was last year.
1 Bloomberg
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