He is seeking to scale back US financial commitments globally. The previous US administrations have favoured ongoing borrowing and deficit spending, adding to the $37 trillion national debt as if it were a non-issue. From Trump’s perspective, continuing to funnel hundreds of billions into a war that isn’t progressing in the right direction, namely, Ukraine, is not viable. While his demands on Ukraine are extremely aggressive and, in many ways, unrealistic for a sovereign nation, they reflect his belief that the current global financial system is unsustainable from an American standpoint.
Is US Fed policy on a less predictable track than last year?
I would expect the Fed to adopt a similar approach to the Trump administration, reserving the right to diverge from its own guidance and pivot if necessary. This is exactly what we saw throughout 2024. Initially, we were given indications of aggressive rate cuts, but many of those didn’t materialize. As market conditions shift, we should expect further adjustments in both guidance and execution. If we do see increased inflationary pressures materialize, the Fed may be constrained in making aggressive cuts.
Would Europe take on more Russian gas if a peace deal materializes?
Europe has some soul-searching to do, and it may take a few election cycles for that to play out. We’ve already seen a major shift in ideological commitments, particularly in migration and refugee policy. I think we’re going to see a similar reckoning with Net Zero policies next, and whether they align with a strategy focused on rebuilding productive capacity in the economy. That kind of soul-searching will need to happen before Europe can reassess its stance on Russia. In some ways, Net Zero policies have had long-term impacts on energy costs, perhaps not as dramatic as Russian sanctions, but still significant. Until Europe reconciles its energy strategy with its economic goals, its approach to Russian gas will remain uncertain.
Can China use its US debt holdings as a bargaining tool in trade negotiations?
China is undoubtedly working to reduce its reliance on its bilateral relationship with the United States. If both sides could establish a more stable and predictable outlook for U.S.-China relations, that would likely be beneficial for everyone. However, China wants to insulate itself from economic pressure, and that’s clearly a driving force behind its move to reduce U.S. Treasury holdings. We’re also seeing this reflected in the soaring price of gold, now at $2, 900 per ounce, and Bitcoin, which has reached $96, 000. These price movements indicate global anxiety over SWIFT sanctions and U.S. monetary policy. If Western asset managers are concerned about how U.S. monetary and sanctions policies might impact their ability to invest in their own economies, imagine what China is thinking. As a result, China is actively seeking alternative asset classes, all of which have surged since US election day.