The market reaction so far

Australian markets reacted to the prospect of a Trump win on Wednesday with shares rising 0.8% and the Australian dollar losing about 1.5% against its US counterpart.

Confirmation of the victory had mixed results. European shares retreated, with the leading Euro Stoxx 50 index down 1.4%, in part because of worries that the Trump administration would proceed with threats to slap tariffs of 10% or more on imports (including 60% on those from China).

Wall Street, though, recorded its biggest post-election day rally in history, according to Bloomberg. The Dow Jones index soared 3.4% to close at a record. Investors were betting on fatter corporate profits.

A contradictory response was the jump in US debt yields. Trump’s plans to cut taxes – or extend those cuts he passed in 2017 that are due to expire next year – are widely seen as likely to increase the federal deficit. (Winning the Senate and potentially the House of Representatives will make it easier for Trump to get his policies passed into law.)

More supply of debt usually means the issuer has to pay a higher interest rate, or yield, to attract buyers. Higher borrowing costs typically dent corporate borrowers – so some of those recent stock price gains may prove temporary.

What does it mean for Australia?

The Reserve Bank governor, Michele Bullock, told Senate estimates on Thursday that it was “too early” to tell how Australia would be affected by a president-elect who won’t take office until 20 January. (She might have added: who doesn’t always do what he says he’ll do.)

Her assistant governor, Christopher Kent, was more forthcoming. Should Trump slap those hefty tariffs on China – which takes more than a third of Australia’s exports – the impact may be “adverse”.

Kent also noted borrowing costs may be higher than they would otherwise be.

Bigger US deficits probably mean “higher long-term interest rates in the US, higher inflation in the US, and quite possibly higher growth for a time”, he said. And given the influence of the giant US debt market, such a shift would “have upward effects on global interest rates”. 

Prior to the election results, investors had already been betting the first RBA interest rate cut wouldn’t come until a fair way into 2024. They’ve pushed back the timing a tad, with a 25 basis-point cash rate cut now about an 80% chance by May and 100% by July.

Trump attacked the US Fed’s first big rate cut in September during the election campaign as a “political move”, and said presidents should have a say in interest-rate setting.

Hints of interference would damage confidence that the Fed would act should inflation be revived by the higher targets. Investors would add a risk premium – nudging market rates up in the process.

What’s going to happen to the Australian dollar?

While the dollar lost ground to the greenback on Wednesday, it actually rose more broadly, at least according to the trade-weighted gauge.

Most of our exports go to places that don’t use the dollar, such as China and Japan. In recent days, their currencies have tended to track the Australian dollar lower, or fall even more, against the US dollar.

What are the uncertainties?

The biggest uncertainty has to be whether Trump acts on his promises, and how soon.

“At this stage we would be sticking to our inflation outlook,” Bullock told estimates, adding later that “I don’t have a view” on whether a Trump presidency would mean Australia’s interest rates would stay high for longer.

Her assistant, Kent, also noted “you can’t imagine … that China will do nothing” in response to being hit by tariffs. It’s no accident that the Chinese government is holding a special meeting of its parliamentary standing committee on 4-8 November. 

Kent didn’t talk about retaliatory action (in China or elsewhere). Instead, we may see more fiscal stimulus from China’s authorities to bolster growth – trade war or not.

“We don’t know the size of that, and we don’t know where it’s directed to,” he said.

Another of Trump’s big promises, to deport illegal immigrants, could have wider consequences. As the independent economist Saul Eslake notes, the expulsion of 1.3 million to 8 million workers “will add to inflation and disrupt US and potentially global supply chains, adding to global inflationary pressures”.

Pulling the US out of the Paris climate accord may collapse that agreement, Eslake says. That, in turn, could “trigger the need for a rethink of Australia’s own emissions reduction targets and strategies”.

Other Trump pledges – such as swift ends to the wars in Ukraine and the Middle East – might be just as mercurial, dangerous, or fantastic.

Brace then for a season of heightened uncertainty for markets and much more.

How will Australian shares respond?

While equities and crypto assets soared in the US after it became clear Trump would win the presidential race, bond prices fell as investors fretted that the incoming president’s spending policies and promised tariffs could fuel another bout of inflation.

The knock-on effects of the election on Australian stocks have been mixed.

A rising US dollar is traditionally a weight on the price of commodities, which is a major factor for Australia’s resources heavy share market.

Omkar Joshi, the chief investment officer at Opal Capital Management, says that even though the election result has been broadly well received by markets because of the clarity it brought, it’s not a case of “just everything goes up”.

“Trump is definitely seen as more business-friendly from the perspective of tax cuts, less regulation, tariffs and protectionist policies,” Joshi says.

On the ASX, some specific stocks such as Australian steelmaker BlueScope, which has operations in North America, have risen sharply because it could benefit from higher tariffs on steel imported into the US.

Joshi says the fortunes of Australia’s iron ore miners are more closely tied to how China handles its domestic economy than the result of the US election.

“It is really about what does China do; does it actually stimulate more if the US imposes tariffs?”