Global markets to trade with considerable volatility as Trump takes office: Saxo Bank

President-elect Donald J. Trump has pledged to immediately roll out a series of new initiatives and policy announcements after his inauguration on January 20th. Saxo Bank, in its latest quarterly outlook, suggests that global markets will be in a wait-and-see reaction mode during the first quarter of 2025, even before the impact and ripple effects of Trump's agenda become apparent.

Many key Trump 2.0 initiatives, from tax and deregulation to fiscal policy, may not be fully clear until fiscal year 2026. However, markets will do their best to look ahead and are likely to experience considerable volatility as the world adjusts to a tougher US policy mix, which will stimulate different reactions domestically and especially in the wider world.

Despite market uncertainty, 2024 has been a remarkable year for global equities, largely meaning US equities, as the latter makes up as much as 70% of the MSCI World Index. This is a highly concentrated index with the majority of its exposure in large-cap US stocks. The top 20 US stocks by market cap currently account for about 40% of the index. In addition, a strong US dollar has limited emerging market gains in 2024, while Europe has lagged, although the MSCI Europe index has fared okay in Euro terms.

Trump's agenda aims to re-industrialize the United States, both to bring back manufacturing jobs and to improve national security, which the pandemic has made clear includes critical industrial supply chains. At the same time, it aims to improve the country’s massive trade and budget deficits and overall rising debt trajectory, while maintaining low inflation.

John Hardy, Chief Macro Strategist at Saxo Bank, stated that these goals are inherently contradictory unless there is some miraculous improvement in productivity and real growth. Trump hopes to achieve and pay for most of his agenda via tariffs and economic growth. Scott Bessent, the US Treasury Secretary nominee, has proposed a "3-3-3 plan" to achieve Trump's agenda. This plan includes reducing the fiscal deficit from more than double in recent years to 3% of GDP, achieving 3% real GDP growth via deregulation and tax cuts, and achieving low inflation via a 3 million barrel-per-day "equivalent" increase in US oil/gas production.

“More likely, we will see half or less of that growth, as any fiscal slowdown is bound to reduce overall GDP growth. After all, it was Biden’s deficits that have driven the US outperformance versus the rest of the world over the last two years, thereby avoiding the US recession that never seemed to arrive from the post-pandemic hangover,” Hardy added. Saxo Bank adds that the current consensus forecast for US GDP growth in 2025 is +2.1%, which is an optimistic forecast considering the risks.

Ahead of Trump's inauguration, US Treasury yields have risen across the yield curve as the market generally expects the new president to bring sticky inflation and still very large budget deficits, and possibly even robust economic growth. Current forecasts show that net US Treasury debt servicing will reach $1 trillion in 2025, up from just under $900 billion in 2024 and $650 billion in 2023.

Saxo Bank states that the only scenario that could limit US long-term Treasury yields via organic market forces would be a recession with massive fiscal spending cuts and a flight to safety. Even then, such a recession would ultimately worsen the deficit/debt trajectory and inevitably trigger a new round of Fed QE and politically necessary fiscal stimulus. Hardy added, "Either way, all paths require US nominal GDP growth to outpace the average rate on US Treasury debt issuance over the medium to long term."

Regarding US-China relations under Presidents Trump and Xi, the potential outcomes are highly diverse. Saxo Bank anticipates that Trump will initially impose targeted tariffs and promise more to come, while also extending an invitation to reach a deal. At the same time, China needs to reinvigorate its economy, whether or not some grand deal, or even a full “Mar-a-Lago Accord,” is reached on US-China trade and monetary policy.

As for Europe, the continent has a distinct advantage relative to most of the rest of the world. Things are already so bad in core Europe that they may struggle to get much worse, at least for the traditional two main core Eurozone powerhouses, France and Germany. France is currently the weakest link in the Eurozone. France’s fiscal stability problems are so severe that in the first few trading days of 2025, French 10-year bond yields rose above Greek 10-year bond yields for the first time ever.

Meanwhile, Germany offers considerable upside potential after its upcoming February 23rd election. Germany will need productivity growth, particularly via lower energy prices, deregulation, and increased investment in infrastructure and open innovation. However, the biggest uncertainty for Europe is the possibility of Eurobonds being issued at the Eurozone level to fund massive new national security investments, secure cheaper long-term energy supplies, and strengthen infrastructure and supply chains across Europe.