After a 4-year hiatus, a strong return to the American political arena. Looking ahead, how will the 2.0 policies impact the global capital markets?

On November 22nd, Bank of America's Global Economist Claudio Irigoyen released the latest research report, stating that economic policies mainly involve trade, immigration, fiscal policy, and deregulation. Due to the unclear scale and sequence of policies, the impact on economic growth, inflation, and monetary policy is uncertain.

Based on this, the report assumes three scenarios that 2.0 might trigger in the coming years.

Scenario 1: Deregulation and balanced finance, slightly strong dollar, lower gold prices

In the best-case scenario, 2.0 will focus on a growth agenda, including deregulation policies, and active tax cuts while reducing fiscal spending to ensure budget balance, and downplaying tariffs and immigration restrictions that are detrimental to economic growth.

Looking at industries, the report states that relaxing regulations on the banking industry can help ease credit constraints and promote the stability of the entire financial system (especially for private lending), and relaxing regulations on the energy industry may put downward pressure on energy, especially oil prices, helping to reduce the trade deficit.

Advertisement

On trade, 2.0's tariff and immigration restriction policies may be relatively moderate, benefiting emerging economies and potentially pushing global economic growth above 3.7%.

The report indicates that in this situation, global real interest rates and inflation expectations will rise, the dollar will be slightly strong, and gold prices will be relatively low. The U.S. economic growth is expected to exceed 3%, and the Federal Reserve may continue to "stand still" or even raise interest rates.

The report also adds that the movement of the dollar may not show a clear trend because it is not only affected by U.S. policies; the trend of inflation mainly depends on how expansionary fiscal policies are implemented.

Scenario 2: Significantly increased tariffs, increased recession risk, global risk-aversion scenario

In the worst-case scenario, 2.0's deregulation agenda is stuck, fiscal loosening is minimal, and only a small amount of tax cuts will be implemented. Due to concerns about government debt, the market may start pricing higher interest rate levels.

The report states that in terms of trade policy, the U.S. government will push for aggressive tariff policies, significantly increasing tariff rates and significantly tightening immigration policies, accelerating the outflow of immigrant labor.

Bank of America believes that aggressive tariff policies will hit global trade, increase uncertainty, lead to a collapse in global investment, a decline in consumer confidence, a significant drop in stock prices, and ultimately a decline in consumption, leading to a recession in the U.S. economy.

The report indicates that in this situation, although tariff increases will push up inflation in the short term, the Federal Reserve will still significantly cut interest rates out of concern for economic growth, and real interest rates across industries will be low after excluding inflation.

Bank of America expects that in this global risk-aversion scenario, long-term inflation expectations will also decline; the trend of the dollar is still uncertain and may weaken as the Federal Reserve eases monetary policy, also affected by the subsequent fiscal and monetary policies of other countries.

Scenario 3: The U.S. falls into stagflation, the dollar weakens comprehensively, benefiting gold and cryptocurrencies

In the scenario where tail risks gather, almost all conditions enter the "worst" state, geopolitical situations extremely escalate, and the U.S. economy will fall into stagflation.

Moreover, considering that the U.S. government may not be able to finance deficits at a reasonable interest rate, the Federal Reserve may be forced to implement yield curve control, which is equivalent to monetizing fiscal deficits, severely damaging the reputation of the Federal Reserve.

The report adds that in this scenario, due to extreme convergence of financial conditions, real interest rates remain low, but long-term inflation and its expectations will rise significantly. The status of the dollar as a reserve currency will weaken comprehensively after being questioned, and gold and cryptocurrencies will become the main beneficiaries.

For the global economy, this is also an extremely unfavorable scenario, which may lead to a global economic recession and further complicate geopolitical situations.