Markets’ response to the evident risks has thus far consisted primarily of risk rotation
This seems increasingly likely to evolve into full-fledged risk reduction
That it has not done so to date is thanks not only to dwindling hopes that Trump is bluffing, but also (yet again) to support from central bank liquidity
It is tempting to look at the performance of US equities in 2H24 and conclude that central bank liquidity no longer matters for markets
But a closer examination of both other markets and shorter timescales suggests this would be a mistake
It instead highlights the predominant role currently being played by fund flows and US exceptionalism
While it is possible to paint scenarios where liquidity contributes to a melt-up in risk in early 2025, on balance we see it as one of a number of reasons to be skeptical of the bullish consensus
Trump’s triumph is testament not only to the inadequacies of the Democratic campaign and the electorate’s dislike of inflation, but to the popularity of populism globally
Trump trades likely to continue at least until inauguration, and conceivably thereafter – unless a bond rout stops them first
The right places to position are America-first trades which will benefit from – or at least withstand – higher term premia
