"All up" seems to be the trend in the US market right now. Bitcoin is climbing, the dollar is strengthening and the S&P 500 has surged by over 3 per cent since Trump won the presidential election last week. But what’s behind this rally?
Trump Trade: Almost a week has passed since Trump won over the White House again. And if there is any cohort that seems to be riding the election results sentiment, it is perhaps the investors. From cryptocurrency to equities, every single market is trading in green. In fact, the Dollar Index—a gauge for dollar's relative strength—is trading at a four-month high, and hovering around $105.8. If this trend continues, the index could soon break past its 52-week high.
The everything rally has sent the investor mood on a sharp uptrend, or as some call it the 'Trump Trade' effect, which refers to the trend play or shift in market sentiment largely owing to the economic policies under Trump's presidency.
However, what might work for the Western superpower may not play out as well for other nations, especially emerging economies. The presidential election results failed to boost the domestic market mood, as benchmark indices—Sensex and Nifty—continued their downward trend just the day after the results.
Here is all you need to know about 'Trump Trade' and how it might impact Indian investors-
While there is no exact definition as the term is more of a product of all the buzz around the US presidential election, the wordplay signals to a broader concept. Trump trade majorly refers to the behavioural shift and investment picture that might come into effect during his tenure. From corporate tax cuts to infrastructure boosts and surges in trade tariffs, Trump trade refers to a pro-inflationary policy view.
Trump has already proposed to slap tariffs as high as 60 per cent on all goods imported from China. For other nations, the tariff levels would stand at atleast 10 per cent. His major focus primarily lies on creating a strong business environment, which he refers to as 'Make America Great Again.'
However, it's just not limited to the policy view but backhand play as well. His billionaire supporter and companion, Elon Musk has been a strong advocate of cryptocurrency. Now, back in 2021, Trump had openly displayed his disinterest in the currency. "Bitcoin, it just seems like a scam," Trump said. "I don't like it because it's another currency competing against the dollar."
However, there seems to have been a major shift in the air. Not only the Republican president has openly displayed his support for crypto, but he also vowed to make the US 'crypto capital of the planet.' In the last one week, the price of Bitcoin has surged by over 25 per cent, and is now quite close to touch the $90,000 level mark.
Even the US stock soared to new heights. The Dow Jones Industrial Average witnessed an increase of nearly 5 per cent since the election result day.
As for the dollar index, the impressive surge has already been mentioned above, but that might not bode well for emerging economies. As per data by Fidelity, the rising dollar index often sends emerging markets on a downtrend. "When the USD strengthens, emerging market economies typically feel pressure to raise interest rates to defend their currencies, which often proves to be a negative for equity market performance," the investment company said in a blog post.
Many economists have already flagged Trump's policy proposals as pro-inflationary. And when inflation levels upshoot, there is a sure-shot signal that the value of the currency might witness a fall.
But before the fundamentals play out in the longer run, Trump's administration is already considering policies to devalue the dollar. A rather aggressive move that might help in elevating export levels but bring back inflation. This idea is apparently being discussed by Robert Lighthizer, US Trade Representative, as per sources cited in a report by Politico, earlier this year.
If the dollar goes down, it might not be a good sign for investors putting their money in the Indian stock market. This is primarily because many international investments, be it stocks, bonds or commodities, are often priced in dollars.
So, if the dollar weakens against the rupee, foreign investors might witness losses when converting their returns back to rupees. This is because the value of their dollar-based investments decreases when exchanged for rupees, reducing their overall gains.
So, while the "Trump Trade" effect might not augur well for domestic investment outlook, a lot remains to be seen how the policy playbook pans out under the Republican leader's presidency.