Investors are downplaying effects of trade wars under Trump, says BofA

Bank of America (BofA) strategists are sounding alarms that investors are brushing off the brutal economic impact a trade war under Donald Trump could unleash.

The outlook? Grim. Emerging-market (EM) currencies are expected to nosedive by 5% in the first half of 2025. Sovereign debt? Prepare for a fire sale. Leading the charge is David Hauner, whose report, fittingly titled “Stay Bearish!,” paints a picture of impending chaos.

China’s yuan will be the first casualty, says BofA. A 40% tariff on Chinese goods, a likely move under Trump, could send the yuan tumbling to 7.6 per dollar. Crank that up to 60%, and the yuan could hit 8 per dollar—levels not seen in years.

For context, the yuan is currently hanging around 7.24. Hauner warns that the effects won’t stop with China. Other EM currencies will get dragged down with it, while high-yield sovereign debt spreads could blow out by 100 basis points.

“Capital outflows from EM and higher risk premiums should occur,” Hauner wrote. And let’s be real—this isn’t 2018. Global economic activity is weaker now, which makes these potential tariffs even more damaging.

Investors banking on a quick recovery might want to rethink their strategy.

Emerging markets are already feeling it

Trump hasn’t even taken office yet, and the effects are already creeping in. The MSCI index for EM currencies is down 1% since his victory and Eastern European currencies are taking the hardest hits. The Russia-Ukraine conflict only adds fuel to this dumpster fire.

Oil prices aren’t helping either. Lower prices are expected to hammer high-yield EM debt, worsening the fallout. And while some optimists believe these conditions might create a contrarian buying opportunity later, BofA is clear: wait. They recommend holding off until the dollar peaks, which they expect in the first quarter of 2025.

For now, BofA suggests shorting EM currencies like the yuan and South African rand. They also like local bonds in countries like Brazil, Hungary, Poland, and Turkey—but only after the dollar hits its peak. Patience is key, they say.

Bitcoin’s rollercoaster ride under Trump

Meanwhile, Bitcoin, the darling of crypto, is in its own drama. It flirted with the $100,000 mark, coming within $300 of the milestone on Friday, but stumbled back to $95,776 by Sunday. By Monday at press time, it had clawed its way back to $98,310.

What’s driving this chaos? Trump. Specifically, his pick for Treasury Secretary, hedge fund executive Scott Bessent. His nomination has sparked optimism in global markets, but Bitcoin traders are split. The market might need to catch its breath before breaking past $100,000.

Since Trump’s election, the crypto market has exploded, gaining over $1 trillion in value. His promise of friendlier regulations and a national Bitcoin reserve has crypto enthusiasts buzzing. But questions remain. How realistic is a Bitcoin reserve? When will it happen? No one knows.

David Lawant from FalconX says: “We may experience consolidation around this level in the near term before a sustained breakthrough above it.” Traders are watching closely. Bitcoin ETFs, riding the Trump wave, have attracted $107 billion in assets since his win.

Meanwhile, Cantor Fitzgerald is reportedly in talks with stablecoin issuer Tether to secure support for a lending program that uses Bitcoin as collateral.

Cantor CEO Howard Lutnick is co-chair of Trump’s transition team and is expected to head the Commerce Department. The transition team is even considering creating a White House Crypto Tsar. If that happens, it would be a first.

Wall Street and the Trump effect

Wall Street is eating up Trump’s economic promises. The Dow hit a record high on Monday, driven by optimism around Bessent’s nomination. Futures tracking small-cap indexes rose 1%, and yields on 30-year Treasury bonds fell across the curve.

Bessent is seen as a fiscal conservative, a trait that’s calming nerves on Wall Street. Joe McCann, CEO of Asymmetric, says, “This sets the stage for more fiscal discipline, which the market is really going to welcome.”

The S&P 500 broke 6,000 points for the first time after the election and has climbed over 4% since November 4. The Russell 2000 index is up more than 8%, both nearing record highs. Brokerage Barclays even raised its 2025 forecast for the S&P 500 to 6,600 points.

The Federal Reserve is in the spotlight as investors await its next move. Will it pause or cut rates? The CME Group’s FedWatch Tool puts the odds of a 25-basis-point cut at 56%. Meanwhile, inflation data from the Personal Consumption Expenditure report and GDP estimates are on everyone’s radar this Thanksgiving week.

Crypto stocks are riding high too. MicroStrategy gained 5.4%, MARA Holdings jumped 4.8%, and Coinbase added 1.4%. However, not everything is sunshine and rainbows. Peabody Energy took a 7% hit after Anglo American decided to offload its Australian coal mines for $3.78 billion. Even retail trading platform Robinhood is making waves, rising 3.9% after Morgan Stanley upgraded it to “overweight.”

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