Today, Donald Trump is going all in. While it’s possible that the U.S. President may ultimately push through and negotiate better deals on various fronts, the realistic outcome is clouded by uncertainty.
A confrontational stance against the entire world can result in the world collectively opposing Trump. It’s important to recognise that nations may not simply acquiesce to his demands. The recent stabilisation in the DAX is underpinned by hopes that Trump will be willing to make concessions in the end.
Despite achieving a strong electoral result back home, the U.S. is teetering on the brink of recession. Trump may suggest that a recession can be triggered and halted at will, but such an approach is fraught with risks—especially considering the economic strategies employed under “Bidenomics,” which, while leading to significant new debt, have created a unique positioning for the U.S. that allowed for extended economic growth in 2023 and 2024, even as much of the rest of the world experiences a downturn.
The U.S. bond markets have been signaling recession risks since July 2022, yet a recession has yet to materialise. However, once a recession sets in, developments can quickly spiral out of control, making it challenging to rein them in. Attempting to manage such crises can often be costly. If other countries see through Trump’s bluff, the fallout he will have to manage will be monumental.
This applies equally to his aggressive approach to tariffs, which risks alienating even the closest allies of the U.S. Notably, traditional rivals are now finding common ground, as evidenced by the cooperation between China, Japan, and South Korea. This collaboration centers around trade in semiconductors and chips, despite the U.S. aim to restrict China’s access to these vital resources. Thus, Trump’s tariff policies may yield contrary outcomes to those he desires.
Ultimately, with central banks poised to intervene, a mechanism that has historically come into play during significant economic crises may be triggered. The Fed has nearly stopped its sale of Treasury bonds—purchased during the economic emergency of the pandemic and meant to be offloaded now. However, this plan seems unlikely to materialise. Markets are already anticipating three interest rate cuts by the Fed within this year, with a potential fourth cut in 2026. The normalisation of monetary policy that seemed feasible just five or six months ago has been scrapped. The U.S. Federal Reserve is prepared to absorb the economic consequences of the tariff policies, possibly reinstating bond purchases as necessary.
Written by Jochen Stanzl, Chief Market Analyst at CMC Markets
