Global financial markets face further uncertainty over coming weeks as investors await word on future US economic policies following Donald Trump’s surprise election to the presidency.
Mr Trump has called for lower taxes, railed against global free trade agreements as well as calling for a curb on immigration, especially from its poorer neighbour Mexico.
Such policies, if pursued, may lower global economic growth as the movement of goods, services and people are further restricted following the UK’s move earlier this year to leave the European Union. Mr Trump has suggested slapping a 45 per cent tariff on Chinese goods and 35 per cent on those from Mexico.
“If followed through, Trump’s economic policies call for lower taxes, protectionist measures and restrictions on free trade – all of which are unfavourable for global markets around the world,” said Nadi Barghouti, head of asset management at Emirates Investment Bank.
Mr Barghouti said global equities may drop 10 per cent in the coming weeks, with currencies of the main US trading partners dropping against the dollar.
The S&P 500 dropped 0.5 per cent while the Bloomberg Barclays US Aggregate Bond Index opened 0.4 per cent lower. At the same time, traders lowered bets that the US Federal Reserve will raise interest rates this year because of concerns that Trump policies may disrupt economic growth.
Futures traders see a 76 per cent probability the Federal Reserve will raise interest rates by December, compared with 80 per cent on Monday chance a week ago, according to data compiled by Bloomberg based on Fed funds.
“While tax cuts that were implemented in the first year of a Trump administration might give GDP a substantial boost for a year or so, the combined supply shock from a contraction in the labour force and from a disruption to international trade would likely put the economy into a recession after a year or two,” Kevin Logan, chief economist at HSBC, wrote in a note to clients.
“In our view, the full implementation of Trump’s policy proposals would increase the volatility of aggregate economic activity, with potential repercussions for the volatility of financial markets, and lead to tighter monetary policy.”
The US economy has led recovery among developed markets in the aftermath of the 2008 financial crisis and the US Federal Reserve began raising rates last year following a record stretch of low rates.
Central banks in Europe and Japan, however, are still struggling to rekindle growth and have been cutting rates into negative territory for the first time to reverse economic fortunes.
Other major global stock indexes also plunged on fears that a slowdown in trade will dent the global economy. Europe’s benchmark index, the Euro Stoxx 50, fell as much as 2.8 per cent, while the Nikkei 225 benchmark of Japanese equities fell 5.4 per cent.
Investors in emerging markets were the most worried as developing nations rely heavily on exports. The MSCI Emerging Markets Index, a key barometer of listed companies across the developing world, fell 2 per cent yesterday afternoon UAE time. Emerging market currencies also experienced steep losses, especially in Mexico, which relies heavily on trade with the US. The peso fell as much as 11.8 per cent before regaining some ground against the dollar.
mkassem@thenational.ae
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