A resilient US economy, the anticipation and eventual victory of Donald Trump and his recent appointments along with risks around inflation have been driving nominal and real yields over the past months. But US equities and the dollar rose amid a belief that the US economy would benefit from Trump’s policies at the expense of the rest of the world, i.e., Europe and some Asian countries. While we agree that US policies would reverberate across European assets and emerging markets, the actual impact depends on specific measures and countermeasures. We think the following factors will be major market drivers

• Fiscal impact of US policies (tax cuts, deregulation etc on consumption not clear Indications are it would be positive for growth in the near term 2025 and then weigh on growth in 2026. But concerns about the high fiscal deficit and debt could put additional pressure on bond yields.
• Fed is walking a tightrope in its attempt to weed out the last leg of inflation. Policies around immigration control (subsequently wage pressure) and import tariffs could create upward risks on inflation. Hence, the Fed will become more data dependent and may ease less than currently expected. This would have implications for the ECB and other global central banks.
• Balancing EU fiscal governance rules with the need to invest more to improve productivity enhance competitiveness and improve defence will be tough. Hence, fiscal policies in countries such as Germany Schuldenbremse post elections, France and Italy become more important.
• China realises that negotiating with Trump is difficult. The country will respond proportionately to the US. Potential responses include a fiscal boost, export controls of critical minerals and CNY devaluation.

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