With Trump now seen as having a higher chance of winning the presidency, market trends around the US open on Monday indicated that "Trump is seen reflationary and risk-on US," Evercore ISI analysts said in a note.
Early trading on Monday provided insight into how the market perceives the potential impact of a second Trump presidency on key economic indicators, asset markets, and interest rates, especially if it comes with a Congressional sweep that allows greater fiscal policy freedom.
Evercore said an event window extending to one hour after the US market open was used to try to filter out other developments, though it means asset prices could still be affected by risk-off sentiment related to political violence.
"This allows us to get a sense of direction, though we are very wary about trying to be too specific on magnitudes."
As seen previously, the market's reaction to Trump is reflationary, pro-growth, and risk-on for the US, with higher yields, a steeper yield curve, increased inflation swaps, higher equities, and lower credit spreads, analysts noted. Growth stocks and small caps outperformed defensives and large caps, easing financial conditions.
The reflationary aspect aligns with standard macro analysis.
"The disconnect here is on growth where standard macro modeling suggests Trump’s trade and migration policies would significantly harm growth; the market seems to be putting more weight on the pro-growth contribution from deregulation, easier fiscal policies, and stronger animal spirits among SMEs,” the note says.
Interestingly, the 2025 Fed rates contract remained unchanged one hour into the US open. Evercore believes Trump’s reflationary policies would likely lead to fewer Fed cuts next year. The market suggests that the rates action will be in the US term premium, with longer-term yields increasing enough to counteract the reflationary policy shock on Fed funds.
In contrast, the market's reaction to Trump is anti-growth and risk-off for Europe, where yields moved lower and equities fell, with a widening of risk premia and tighter financial conditions.
"This reinforces our sense that Trump – through trade wars and reduced security guarantees – would be disinflationary / rates lower Europe, though we note that eurozone inflation swaps were essentially unchanged in the window we analyzed."
“The wider market action is consistent with the idea that – to rework the famous 1971 quote from then Treasury Secretary Connally about the dollar – Trump might be “our president, but your problem”,” analysts added.
Unlike with the Fed, the 2025 ECB policy rates contract did move lower, though only slightly, indicating more potential changes ahead. A larger response in FX might have been expected, as Trump is often seen as dollar-positive, which usually correlates with these other asset price changes.
Evercore notes this may reflect a temporary risk-off sentiment from foreign investors toward dollar assets due to political violence, differing views on Trump’s impact, or the need to attract foreign capital to fund larger deficits, balancing the effects on growth, risk assets, and rate differentials.