AXA IM: ECB is the only European institution with capacity to respond swiftly to Trump's victory

7 november 2024

In a reaction to the US election results, three experts from AXA Investment Managers provide their view on what Trump's victory means for markets and investors:

Trump 2.0 sends bond yields and equities higher (2016 redux)

Chris Iggo, CIO:

'Markets have responded as expected to Donald Trump’s victory – higher Treasury bond yields, firmer equities, and a stronger dollar. It is a re-run of 2016. [...]  If the pattern of 2016 is to be repeated, then we could be looking at yields continuing to increase another 100bp or so over the next year or two, giving a nominal yield of around 5.5%. [...]

The fundamental story would be Trump’s supposed preference for policies that would be fiscally expansionary and inflationary and whether this will prevent the Federal Reserve (Fed) from cutting interest rates as much as the market had hoped. Growth is arguably above trend, inflation is still above target, and so the Fed might need to keep rates on the tighter side of neutral for longer.'

Trump sweep replaces political uncertainty for policy uncertainty

David Page, Head of Macro Research:

'Uncertainty over the US outlook now shifts from political uncertainty to policy uncertainty. [...] We question whether Trump will truly deliver a 10% blanket global tariff and 60% tariff on China; whether he will deport the eight million-plus undocumented migrants in the US; and doubt that the Republican administration will deliver the full extent of fiscal easing trailed by Trump. But we believe that he will come out of the stalls moving in all of these directions in 2025, with marked implications for the US economic outlook.

While we assume many of these policies will take time to implement, we expect to see some tariff increases, restricted migrant flows and moves towards a fiscal easing package across the course of 2025. [...] We consider tariffs and migration restriction to be supply shocks and fiscal easing to be a demand boost.

This is likely to see US inflation reaccelerate. [...] In terms of growth, depending on financial market reaction, we expect US activity to remain solid into 2025 – softening from a robust 2.8% expected for 2024, but likely remaining above trend at 2.3% for 2025. However, assuming broad implementation of Trump’s policies across 2026, we expect to see material headwinds to growth in 2026.'

US election results mean ECB will have to accelerate rate cuts

Gilles Moëc, AXA Group Chief Economist and AXA IM Head of Research:

'In Europe, the main takeaway is that the ECB will need to accelerate its interest rate cuts. The economy is unlikely to improve as a ‘wait and see’ attitude could prevail in export-oriented businesses. The 10% tariff itself on European products is probably manageable, but the 60% one on Chinese products could be very disruptive, either by lowering Chinese demand or by triggering a massive devaluation of the yuan, and/or incentivising Chinese producers to compete more fiercely with European suppliers outside the US market.

Energy price volatility could be another source of uncertainty, as the potential of further escalation of conflict in the Middle East has just risen again. European national governments are not in an ideal position to provide reassurance or guidance, with both France and Germany in the midst of domestic political difficulties, while the European Union populists will want to push their advantage. The ECB is the only European institution with capacity to respond swiftly in the current configuration.'