The dispute over the debt ceiling, trade tariff policies, the slower-than-expected progress in the Russia-Ukraine conflict negotiations, and other factors have intensified market competition, leading to increased volatility in global asset prices.
Author: Zhang Jiqiang
Source: Caixin
Donald Trump will officially take office as the President of the United States on January 20. According to the Associated Press, Trump may issue more than 100 executive orders on his first day in office. Recently, discussions around Trump's post-inauguration policies in areas such as the economy, tariffs, and geopolitics have intensified, and Trump's own style has further increased uncertainty. Global asset prices have seen increased volatility, with the US dollar and US bond yields rising, non-US currencies generally under pressure, US stocks fluctuating and declining, and gold and oil prices strengthening. Factors such as the dispute over the debt ceiling, trade tariff policies, and the slower-than-expected progress in the Russia-Ukraine conflict negotiations have exacerbated market competition.
First, the domestic policy competition in the US is mainly focused on the debt ceiling, fiscal policy, and the Federal Reserve's monetary policy. The fiscal deficit is one of the focal points of Trump 2.0's policy competition. Trump's proposed temporary suspension of the debt ceiling has not been approved by Congress, and Musk has acknowledged that the $2 trillion spending reduction target is unattainable, indicating that there is significant uncertainty about the fiscal outlook, with both upside and downside risks.
Although the Republicans hold a majority in both houses, forming a seemingly "unified government", their advantage is not obvious. The recent dispute over the debt ceiling shows that Trump's subsequent tax cut plans may require the support of the Republican moderates, otherwise they may face certain obstacles. The divisions within the Republican Party are mainly reflected in the priorities of fiscal policy. Conservative factions tend to significantly reduce federal spending, especially in the areas of social welfare and education, while moderates are more inclined to maintain the current spending levels to avoid too much impact on middle and low-income voters. In addition, Trump's planned new round of tax cuts, especially the tax reductions for businesses and high-income groups, may also face opposition from the moderate faction. Moderates are concerned that further tax cuts could exacerbate the fiscal deficit problem and be seen by voters as favoring the wealthy, thereby weakening the Republican Party's support base among the middle class and low-income voters. To push through the tax cut plan, Trump may need to compromise in areas such as infrastructure investment or defense spending to gain the support of the moderates. However, the coordination difficulties within the party may still become an important constraint on Trump's governance.
Musk's acknowledgment that the $2 trillion spending reduction target is unattainable indicates that there is a lack of a solid foundation for significantly reducing US fiscal spending, implying that the deficit may remain at a relatively high level in the long run. In the structure of US fiscal spending, social security, Medicare, and defense spending account for a large proportion, and reducing spending in these areas faces significant political resistance. The spending reduction plans proposed by Republican conservatives are mainly focused on reducing spending in areas such as education, environmental protection, and other non-defense sectors, but the budgets of these sectors are relatively small, and their impact on the overall deficit may be limited. Furthermore, with the ongoing Russia-Ukraine conflict and the escalation of geopolitical tensions, a significant reduction in the defense budget may be difficult to achieve. At the same time, the high-interest rate environment has further increased the federal government's interest expenditure, making the fiscal deficit problem more severe. The expectation that the US fiscal deficit will remain at a high level in the coming years not only puts long-term pressure on the US bond market but may also undermine the status of the US dollar, increasing the uncertainty in global markets.
The market is also concerned about how the Federal Reserve will respond to the impact of Trump 2.0. Recently, with the strong economic fundamentals and inflation risks, the Federal Reserve has taken a more hawkish stance, adding another layer of complexity to the domestic policy competition in the US. The strong performance of the US non-farm employment data in December, with job growth far exceeding market expectations and the unemployment rate lower than expected, indicates that the labor market remains resilient. Combined with the recent hawkish statements from Federal Reserve officials emphasizing the persistent inflation risks and the reduced visibility of the economic outlook, the market has significantly reduced its expectations for interest rate cuts. Looking ahead, the uncertainty of Trump's fiscal policy combined with the trend of rising long-term neutral interest rates will make the Federal Reserve's decision-making more cautious. The recent sustained rise and increased volatility in US bond yields reflect the market's concerns about inflation and the interest rate outlook.
Second, the international policy competition is mainly focused on trade tariffs and geopolitics. Whether it is Trump's own statements on tariffs and the geopolitical situation, or the Biden administration's recent measures to tighten restrictions on AI chips and the Russian energy industry, they have objectively increased the complexity and uncertainty of international competition.
Trump has made frequent statements on the tariff issue recently, denying reports that his tariff plans may be discounted, and reiterating his tough stance on tariffs. Market concerns about the escalation of trade frictions have intensified, leading to increased volatility in global risk assets. Trump's tariff policy is not only an economic tool but also a tool for political competition. By raising tariffs, Trump tries to get major trading partners to make more concessions in negotiations, while also demonstrating his "America First" economic stance to domestic voters. However, the market is more concerned about the risks of rising inflation levels and increased pressure on global supply chains. The specific implementation effects of the tariffs will depend on how the Trump administration balances domestic inflationary pressures, international negotiation leverage, and market stability. The current lack of policy visibility has led to increased risk aversion and asset volatility in the market.
In terms of geopolitics, the progress of the Russia-Ukraine negotiations may be slower than expected, and Trump's "ambitions" for Greenland or even Canada may exacerbate market tensions, making the international competition more complex. The Biden administration's sanctions on Russia have exacerbated the tensions, making the future trajectory of the Russia-Ukraine situation more complicated. Trump has pushed back the timeline for resolving the Russia-Ukraine conflict from "the first day in office" to "within the first six months". The geopolitical tensions have raised concerns about energy supply, driving up oil and natural gas prices. The strategic competition between the US, NATO, and Russia will continue to shape the global energy market and geopolitical landscape. For non-US countries, in addition to reciprocal trade measures such as tariffs, adjusting their holdings of US debt may also become a bargaining chip in negotiations and competition with the US, potentially putting upward pressure on US bond yields.
