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What Trump’s second term as US president could mean for financial markets

Secret Service agents stand guard around presidential candidate Donald Trump.

A look back at President Trump’s relations with NATO, Russia, Ukraine and the trade war with China. OANDA explains how these relationships have affected financial markets and what to expect from Trump in a second term.

Donald Trump, Republican candidate for President of the United States

Donald Trump served as President of the United States from 2016 to 2020 and lost the 2020 election to Joe Biden. Midway through the 2024 presidential campaign, Trump blocked the Republican nomination for president after easily defeating other Republican candidates.

This article will discuss the possible ramifications that a second Trump presidency could have on global financial markets.

Trump’s “America First” doctrine

Relationship with NATO

The North Atlantic Treaty Organization, or NATO, is made up of 31 member countries and essentially serves as the military umbrella that has protected Europe since World War II.

The United States funds approximately 22% of NATO’s budget, and the question of “fair burden sharing” among NATO members has been raised for many years. In 2014, NATO members agreed to set a goal of spending 2% of their GDP on military budgets. At that time, only three members had reached the goal, including the United States. The alliance’s defense spending has since increased, and NATO’s chief announced in February 2024 that 18 members are expected to meet the 2% target.

As president, Donald Trump often complained that European NATO members were not paying their fair share of NATO funding and publicly called on them to increase their defense spending. These comments, often extreme, were usually followed by volatility in global financial markets, particularly European equity markets and foreign exchange markets. Investors were understandably concerned about the health of the NATO alliance, which has been a cornerstone of global security since World War II. The specter of a US president publicly attacking other NATO members endangers geopolitical stability and hurts investor confidence.

During the 2024 presidential campaign, Trump continued to chastise NATO members for not paying their fair share of defense spending. It was reported that when Trump was president, he considered leaving NATO over this issue.

This has understandably sparked concern in European capitals as well as the Biden administration, with the latter calling Trump’s position irresponsible and dangerous. At the same time, Trump supporters would say that Trump’s threats against Europeans are the reason more NATO members have met the 2% defense spending target and, in doing so, Trump actually strengthened the alliance.

Note: Iceland has no armed forces.

OANDA, NATO

Trump’s potential re-election could fuel market volatility amid NATO tensions

Chart showing which countries are meeting NATO’s defense spending target.

If Trump is re-elected president, he can be expected to maintain his tough stance toward NATO members. This could be followed by volatility in the stock and currency markets. Trump’s extreme statements about NATO could lead to increased uncertainty about US membership in NATO, which could have consequences for global financial markets.

Trump supporters would say his bark is worse than his bite and that not every provocative statement turns into policy, but financial markets have been sensitive to Trump’s threats against his European allies.

Note: Iceland has no armed forces. Mid-year estimate.

OANDA, NATO

Trade war with China

Chart showing estimated spending by NATO countries in 2014 and 2023.

The Trump presidency was characterized by an aggressive trade policy toward any country that the United States considered to be involved in unfair trade practices. This has led to trade wars between the United States and much of the world, including China, the European Union, Canada, India and others.

Trump’s most significant trade war has been with China, the world’s second-largest economy after the United States. As president, Trump imposed colossal $250 billion in tariffs on a wide range of imported Chinese goods. China retaliated by imposing tariffs on U.S. goods, leading to a full-blown trade war that lasted through much of Trump’s presidency and disrupted global trade. U.S. tariffs have made Chinese imports more expensive, reduced profits for many U.S. companies and raised prices for U.S. consumers.

Financial markets have experienced increased volatility during trade negotiations. Stock markets suffered sell-offs when tensions were high, while progress in trade negotiations was correlated with rising stock prices.

Some sectors were heavily impacted by the US-China trade war and showed high volatility. These included technology, manufacturing, agriculture, and retail and consumer goods.

• Technology: The U.S. technology sector relies heavily on global supply chains and is heavily exposed to China. Electronics and semiconductor companies, for example, have seen their stock prices fluctuate based on tariffs and developments in trade negotiations.
• Manufacturing: The American manufacturing sector is heavily dependent on Chinese imports, such as automobile manufacturers. These companies have been affected by increased costs due to increased tariffs on imported Chinese goods and have often been negatively affected by supply chain disruptions.
• Agriculture: China imposed retaliatory tariffs on U.S. agricultural products, leading to reduced Chinese demand and lower prices for soybeans, pork and grains.
• Retail and consumer goods: Imposing higher tariffs on Chinese imports meant that American businesses and consumers faced higher costs. The tariffs have reduced corporate profits and dampened U.S. consumer spending, a key driver of the U.S. economy. This had a negative effect on economic activity and damaged investor confidence.

The U.S.-China trade war has had a negative effect on global supply chains, and the stock prices of companies that rely on those supply chains have been sensitive to the ups and downs of the war commercial.

Foreign exchange markets have also shown fluctuations in exchange rates due to the trade war. During periods of stress, the US dollar has strengthened due to a decline in risk appetite, while a reduction in trade tensions has often improved investor confidence, causing the US dollar to fall.

Would Trump 2.0 lead to an escalation of trade wars?

What can we expect under a Trump 2.0 presidency? It is likely that the same aggressive behavior against China will occur again. In January, during the current presidential campaign, Trump said he was considering imposing a blanket tariff on all Chinese imports of 60% or more. China could retaliate against the United States in response to any punitive measures, a scenario that could disrupt global trade and trigger volatility in financial markets, reminiscent of events during Trump’s presidency.

Trump has floated the idea of ​​revoking China’s most favored nation trade status. This would result in federal tariffs of more than 40% on Chinese goods. If China retaliates in the same way, it could lead to another trade war than during Trump’s first term.

Let’s not forget that Trump has initiated trade disputes with his allies, including Canada, the European Union and Japan. As president, Trump could impose punitive trade measures against these trading partners if they engage in what he considers unfair trade practices.

At a political rally in February, Trump said he would pass the “Trump Reciprocal Trade Act,” saying that if China or any other country imposed 100% or 200% tariffs, he would impose tariffs. retaliatory customs duties of the same amount against this country. Trump would likely face strong opposition in Congress to a massive tariff increase, but these types of extreme statements could worry investors about the strong possibility of Donald Trump becoming president of the United States again.

This article is intended for general information purposes only and should not be considered a financial recommendation or advice. Past performance is no guarantee of future results. Opinions are those of the author; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors.

This story was produced by OANDA and edited and distributed by Stacker Media.