strategies and impact on the markets

Donald Trump, with his aggressive economic policy, continues to profoundly influence global financial markets. For example, in 2024 the US stock market experienced a 7% decline due to uncertainty related to his trade policies. His strategy, based on customs duties and the reduction of the trade deficit, is generating complex dynamics in the bull and bear sectors.

Currently, President Trump has accelerated the implementation of tariffs on Canada and Mexico, moving up the expected timelines. This type of measures has generated immediate economic repercussions, triggering a domino effect in the international markets.

Donald Trump: the domino effect of tariffs and the risk of inflation

The use of customs duties as a negotiation tool has created a chain reaction. The tightening of trade policies could result in an increase in import prices, causing a risk of global inflation.

Another possible effect is the competitive devaluation of currencies in the affected countries, an attempt by the involved nations to balance the economic impact. Financial markets are already reacting to this situation, with out-of-scale movements that deserve in-depth analysis.

An interesting fact is the performance of the European stock exchanges compared to Wall Street. Since the end of November 2024, the European stock exchanges have recorded a +5.2%, while Wall Street has lost 3.8%. This scenario is an anomaly in the global market.

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The bond market and Trump’s strategy

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If in the stock sector there is a strengthening of the European exchanges, in the bond sector the opposite is happening. The spread between the 10-year US Treasury bonds and the German Bund is narrowing rapidly. In a few weeks, it has gone from 230 basis points to 160 basis points, indicating an increase in purchases of US securities.

This means that, while Wall Street appears weaker, American government bonds are being purchased with greater intensity compared to European ones. This dynamic suggests a change in strategy by investors, who see US bonds as a safer haven.

The rebalancing of the trade deficit

Donald Trump seems to have changed priorities compared to the past. If before he aimed to keep Wall Street levels high, today his main goal is the rebalancing of the trade deficit between the United States, Eurozone and China.

One of the key strategies to achieve this goal is the reduction of the spread between American and European rates. This could lead to a devaluation of the dollaro, favoring U.S. exports and making imports more expensive.

The trend of the Dollar Index, which measures the value of the dollar against a basket of currencies, shows a clear correlation with the dynamics of rates: when the spread narrows, the dollar tends to weaken. Currently, the Dollar Index has fallen below the 100 mark, indicating a decline from the highs of 2023.

The reduction of the federal deficit and the geopolitical implications

In addition to rebalancing the trade deficit, Trump and the Secretary of the Treasury Bent want to bring the federal deficit back to more sustainable levels. After two consecutive years above 6% of GDP, the goal is to approach pre-COVID values, around 3%.

A part of this strategy is based on a transfer of the economic burden to international allies. For example, Europe will be forced to increase its military budget to support Ukraine, while the United States will reduce direct funding.

Trump’s strategic moves therefore translate into a global economic rebalancing:

• Less deficit in the USA
• Greater deficit in Europe and other countries
• Devaluation of the dollar to stimulate American export

The effects on financial markets

Trump’s decisions are creating strong fluctuations between the stock and bond markets. While European stock exchanges are recording gains, Wall Street is struggling. Conversely, US government bonds are being purchased en masse, while European ones are under pressure.

This strategy could lead the United States into a stagflation phase, characterized by low economic growth and high inflation. Current economic data suggests a possible slowdown of the American economy:

• The GDP for the first quarter of 2025 is estimated to contract by 0.5%
• Consumption fell by 1.3%, a sharp decline compared to the last quarter of 2024
• Private investments have decreased by 3.5%, a sign of economic uncertainty

Historically, the United States has already faced stagflation in the 1970s, with economic consequences that led to a strong recession.

Conclusion: Will Trump continue on this path?

Donald Trump is trying to reverse the economic paradigm that has characterized the United States for decades. If in the past the USA supported the global economy through the deficit and imports, today his administration wants to export more and reduce the deficit.

This strategy, although rational from a commercial standpoint, could generate instability in the global financial markets and put American economic growth at risk.

For example, in the first quarter of 2025, economic instability has already led to the closure of over 500 manufacturing companies in the USA, with a negative impact on the labor market.

The big question is: Will Trump continue on this path or change course before the negative effects outweigh the benefits?