A deus ex machina is a plot device where an unexpected event or character resolves a conflict near the story’s end. Occasionally, these surprises do more than just tie up loose ends—they upend expectations and steer the narrative in an entirely new and unforeseen direction. While casual readers or filmgoers may welcome these twists, often suspending disbelief for the sake of entertainment, financial markets are far less forgiving.
Over the past year, markets have grappled with their own share of unpredictable twists and turns. In a year marked by global elections, investors were caught off guard by India’s lack of a supermajority, Mexico’s unexpected supermajority, a pronounced right-wing shift in the European Parliament and the return of Donald Trump. Meanwhile, dramatic geopolitical developments have added further complexity. Recent headlines have included the collapse of the Assad regime in Syria amid a fragile ceasefire between Israel and Hezbollah in Lebanon, an escalation of the war between Russia and Ukraine and a deepening political crisis in South Korea following the president’s surprise declaration of martial law.
Now, fresh yet familiar concerns are emerging in the United States, with talk of tariffs and mass deportations reentering the spotlight just as US growth and inflation appear to be stabilizing. Against this backdrop, we take a closer look at the key issues demanding attention and their potential implications.
Trump Redux
American equity markets surged the day after Trump’s victory, buoyed by expectations of business-friendly policies favoring financials, energy and tech sectors. In contrast, emerging markets reacted poorly, rattled by the potential for aggressive tariffs and restrictive immigration policies. The concern is that these policies could push inflation higher, lifting US interest rates and strengthening the dollar. This comes at a time when the US economy has shown surprising resilience, with the American consumer driving momentum and lending support to both “soft landing” and “no landing” narratives.
Key questions now emerge: How will the US economy fare under stricter immigration policies, given the research demonstrating that immigration expands the labor force, spurs consumption and boosts tax revenue? How will bond markets respond to potential tax cuts when deficit concerns are already weighing on investor sentiment? And how might another round of tariffs disrupt the global economy?
While it’s too early to definitively answer these questions, much will hinge on the confirmation of Trump’s final cabinet picks, which will shape the aggressiveness of his agenda. Notably, markets seem calmer this time compared to 2016, when Trump’s unexpected win acted as a deus ex machina that upended global politics and international relations. This relative composure could reflect Trump’s narrower majority in the House and the pushback from moderate Republicans against his proposed policies and initial cabinet appointments.
With midterms only two years away, Trump is likely to work hard to deliver on his campaign promises early in his term. However, there’s no guarantee of what measures will pass or how policies will evolve. What is certain is that the year ahead will bring a host of developments—some predictable; others entirely unexpected—that will shape the economic and market landscape.
The Bigger Picture
From a global perspective, Trump’s proposed policies on tariffs and immigration are poised to disrupt trade relationships principally with Mexico, Canada and China, with additional repercussions across Europe. The leaders of these nations are aware of Trump’s strategic use of tariffs as bargaining chips and have demonstrated a readiness to escalate in response if deemed necessary.
At a regional level, Latin America is likely to be affected through three primary channels. First, a stronger dollar will likely pressure Latin American currencies and disrupt the region’s projected easing cycle. Second, with US oil production at its peak, Trump’s “drill baby drill” agenda might push Saudi Arabia to ramp up production, driving oil prices lower to force out competitors. This scenario would hurt revenue prospects for Latin American oil exporters struggling to cover growing fiscal deficits. Third, beyond the repercussion of tariffs, Trump’s immigration policies could significantly impact remittance flows, which are a vital source of household income for many in the region.
In Asia, higher tariffs on Chinese exports will add to China’s already extensive list of concerns, with implications for weaker global growth, particularly for export-oriented economies such as Singapore, Thailand and the Philippines. If Trump’s policies lead to higher inflation and subsequently higher long-dated US Treasury yields, this would disrupt the Fed’s glide path to lower interest rates. Higher US rates relative to Asia would likely result in a stronger US dollar versus Asian currencies, limiting easing moves by Asian central banks.
China’s response to higher tariffs is uncertain. In 2018, the renminbi weakened to offset the impact of US tariffs. Our Asia team believes that Chinese authorities will opt for currency stability this time around, given domestic economic challenges. Recently, China’s Politburo announced a stimulus package that calls for a “moderately loose” monetary policy for next year along with a “more active” fiscal policy. However, the effectiveness of this package on the economy remains unpredictable due to the aggressiveness of Trump’s latest tariff agenda.
Trump’s Second Act
At the end of the day, these economic scenarios are no surprise because we have seen how the first act of this story played out before. What warrants close monitoring is the upcoming sequel: the geopolitical ramifications of an “America First; America Alone” program that is likely to further isolate Latin America, pushing the region into a deeper economic relationship with China. China has steadily secured access to the region’s rich bounty of critical minerals—lithium, nickel, copper and graphite—essential for today’s rapidly growing clean energy technologies, from wind turbines and solar panels to electric vehicles.
Trump’s foreign policy also has adverse implications for Asian security and investment flows, particularly for South Korea and Greater China. Singapore, the region’s most open economy and a key beneficiary of global investment flows, is likely to be most affected by Trump’s protectionist policies. However, Singapore’s neighbors, Malaysia and Indonesia, are likely to be more resilient. Malaysia has been attracting significant foreign direct investment due to the establishment of the Johore State Special Economic Zone (JSSEZ) and Prime Minister Anwar’s fiscal consolidation programs. Meanwhile, Indonesia continues to benefit from its large, robust domestic economy and substantial mineral resource base.
One bright spot in the broader Asia region is India, which may be less impacted as the US shares deep economic and strategic interests with the country. India is also seen as a strategic counterweight to China in foreign policy. India’s large, domestic demand-driven economy has been a major beneficiary of the China+1 supply chain re-configuration. Additionally, Prime Minister Modi and President-elect Trump share a strong relationship.
On the Middle East, Trump has already indicated that the US should distance itself from recent developments in Syria. However, it remains to be seen how long this isolationist stance can be maintained with American troops based in the country. The fall of Assad coincides with multiple ongoing flashpoints across the region. With Syria and Hezbollah in turmoil, Iran’s financial and military capabilities to pursue its geopolitical ambitions have been significantly weakened, raising the potential for Iran and perhaps also other extremist factions to become a destabilizing force in the Middle East.
Connecting the Dots
We anticipate that the interplay of aggressive tariff policies, immigration reforms and geopolitical shifts will have significant implications for both developed and emerging markets. These measures are likely to support the US dollar, place downward pressure on EM currencies and accelerate the reorganization of supply chains. As investors navigate these turbulent waters, it’s essential to stay informed about policy developments and their potential ripple effects. Although the precise outcomes remain uncertain, it’s clear that the coming months will require vigilance to manage risks and capitalize on burgeoning opportunities.