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This week, we witnessed what Stephen Miller, advisor to Donald Trump, described as “the greatest economic master strategy from an American President in history.”
Billionaire supporter Bill Ackman praised the US president’s reversal of most aggressive trade tariffs as “brilliantly executed,” calling it “textbook, Art of the Deal.”
However, someone should inform investors about this remarkable strategic move, as they seem unaware. In the wake of Trump’s significant shift, US stocks surged dramatically, recording one of the largest jumps ever. Yet, the following day presented a stark contrast for Team MAGA: markets across Asia and Europe climbed, but US stocks experienced a sharp decline. The US dollar, which typically thrives in times of uncertainty, declined further after Trump’s tariff retreat and continued to fall as US stocks resumed their downward trend.
While it may be risky to over-analyze short-term fluctuations, these developments suggest some challenging realities for the US administration: stock investors appear more inclined to invest elsewhere, and the US’s core financial assets—Treasuries and the dollar—are losing the shine of global dominance they have held for decades. Trust has diminished, or at the very least, significantly weakened, and it’s hard to envision a way to restore it while Trump occupies the White House, or even thereafter.
Markets are driven by statistics and numbers, but they also hinge on less tangible factors such as perception and reputation. For the US, this foundation relies on elements that investors have historically taken for granted: the rule of law, sensible policymaking, and strong independent institutions. Trump has cast doubt on all of these principles.
Smaller countries and markets offer insights into how these situations typically unfold. UK markets are still cautious more than two years after Liz Truss’s disastrous impact on the gilt market. Every time the relatively new Labour chancellor Rachel Reeves speaks, UK bondholders fear a repeat. The market remains scarred. Japan is still striving to reassure global asset managers to trust its stock market nearly three decades after its collapse. Investors continue to be wary of false hopes.
Changing established positive or negative perceptions is a slow process, especially without a major shock. In the US, that shock is Trump. For global investors, US stocks and bonds have long represented “home.” US assets form a disproportionately large part of the average investor’s portfolio—approximately 60% of global stock indices and 70% of developed markets. Its government bonds constitute the backbone of the financial system.
For decades, investing in the US has been the standard, straightforward option. Pursuing alternatives demands deeper analysis and justification. This status quo is now shifting. US Treasuries are beginning to resemble the more unpredictable UK gilts. Some market participants are even likening them to emerging market bonds, coining the term “EM-ification” of the US as a trending topic this week.
The interplay of politics, trade, and markets is also disadvantageous for the US. Strained trade relations with China reduce China’s incentive to hold dollars. Does Trump genuinely want to witness the consequences if that demand diminishes? An obsession has emerged over whether China might sell off its dollar reserves. However, that is not the key issue; the concern is whether China feels the need to continue accumulating dollars, at least not at the usual rate. The potential fallout could negatively impact US borrowing costs.
The optimistic narrative suggests we may have surpassed peak absurdity. This week, markets imposed some restraint on Trump’s most extreme tariff impulses, and perhaps now some more sensible influences can guide future economic policy on a less adversarial path.
However, as former Polish leader Lech Wałęsa once said, you can’t turn a fish soup back into an aquarium. Finding a return to normalcy seems challenging.
Aside from China, Trump has indeed made concessions. But what guarantees that he won’t change his mind again? What prevents his successor from attempting a similar approach? Long-term investors are not eager to navigate this every four to eight years.
Consequently, a risk premium will now attach itself to US assets, which was absent before. We might call it the Trump premium.
When the recovery commences—and historically, it consistently has—do not expect the US to regain its traditional dominance. Its stocks now carry political risks for the first time. Its bonds no longer seem truly risk-free. The dollar is not functioning like a safe haven during times of stress nor as a currency signaling an upturn in American economic growth.
In contrast to this bleak outlook, Europe presents a robust investment case, just as it did two weeks ago. It is taking genuine steps to enhance the euro’s status as a reserve currency while deepening its financial integration. Is it over-regulated and slower to act? Absolutely. But is it jeopardizing historic geopolitical alliances and endangering global trade? No.
Whatever transpires next, US markets will bear a lasting scar.
