The outcome of the US presidential election shows that the race between Donald Trump and Kamala Harris was not as close as thought. Trump won by a relatively wide margin and even won the popular vote (meaning he got the most votes in absolute terms), which is rare for a Republican candidate. Just as important, the Republicans reclaimed control of the Senate and are on track to retain their majority in the House of Representatives. This means the Republicans control both the upper and lower chamber of Congress, giving Trump the ability to pass his full policy agenda more easily.
Central to Trump’s policy agenda will again be ‘America First’, with a focus on import tariffs, extending and possibly increasing (corporate) tax cuts, and reducing immigration. On top of that, it is expected that he will try to halt climate action and obstruct international cooperation.
Inflationary economics
Trump has hinted at a 60% tariff on Chinese imports and a 10-20% tariff on goods coming from elsewhere. If implemented, this will off course be inflationary, driving up US domestic prices. The same can be expected from his plans for low(er) corporate tax rates. This will likely result in a significant further widening of the US fiscal deficit and an even faster rise of debt compared to GDP, thereby boosting US economic growth and inflation in the short term. On top of that, reducing immigration also works inflationary, as the US labour market is already tight. Reduced labour supply would put upward pressure on wages.
Higher rates, but also in Europe?
Higher inflation and economic growth likely mean the Fed will implement less rate cuts over the next year. This implies US government bond yields staying on a higher level in the short term. Worries on US debt sustainability would add to these upward yield pressures.
How eurozone rates respond to such a scenario is not clearcut. The eurozone will likely retaliate by also imposing tariffs. A trade war would hurt the eurozone disproportionately, since the eurozone is more export dependent. Consequently, lower economic growth could be a counterweight to the initial upward price pressures coming from the imposed tariffs. This could even push the ECB to be more aggressive in its rate cuts, thereby resulting in lower bond yields. That said, it is worthwhile to note that Trump’s previous presidential term has shown that all statements are part of his negotiation tactics. We therefore deem it unlikely that he will really impose a universal tariff, as this would hurt many of the large American corporates that have supported him.
It is therefore best to be pragmatic for the time being. As it stands, yields of longer-term eurozone bonds have moved up over the last few weeks, in line with their US counterparts (but to a lesser extent). To us, this shows that at least in the near term, movements in the US bond market are decisive for longer-term eurozone yields, irrespective of potential eurozone growth and inflation outcomes. Short-term eurozone bond yields for now do seem to be driven by expected lower growth and hence an increased likelihood of more rate cuts.
Bad news for climate goals and renewables
Trump’s return to power could see the US leave the Paris Climate Agreement again, undermining international climate targets. His administration would likely push for expanded fossil fuel drilling while attempting to dismantle climate legislation, like Biden’s Inflation Reduction Act, which incentivizes clean energy. Renewable energy stocks could suffer in the short term, while fossil fuel-related equities could benefit. Higher long-term yields may further discourage capital-intensive green projects, while reduced regulation will likely boost large tech and financial sectors. This would increase the global influence of the owners of the major tech corporations, thereby amplifying the trend towards a less democratic world. In that sense, Trump’s resentment towards NATO is also worrying, as a potential pullback of the US would be a boost to autocratic regimes.
The irreversible sustainable transition
Despite the expected negative effects of a second Trump presidency, the global sustainability transition is unlikely to be halted. Since Trump’s previous term, the momentum for green policies has accelerated, with the EU Green Deal, China’s carbon neutrality targets, and broad investor interest in ESG investment opportunities. Greening the economy has become economically advantageous, making the sustainability transition more resilient to political shifts. If the US wants to compete, it will to some extent have to continue its climate efforts. At the same time, large corporations and financial institutions are trying to live up to heightened sustainability standards set by investors and consumers. Therefore, the sustainable transition will carry on, meaning that impact investing is more than ever a relevant and advantageous long-term investment strategy.