Trump's Tariff Pledges Stir Market Volatility Ahead of Inauguration

As the world awaits the inauguration of US President-elect Donald Trump on Monday, markets are bracing for potential volatility, with investors keeping a close eye on his proposed tariff policies. Trump's vows to support blockchain technology and his personal and business ties to the cryptocurrency industry have lifted cryptocurrency prices, with the price of bitcoin (BTCUSD) surging above $105,000 on Friday. Other "Trump trades" such as Trump Media & Technology Group (DJT) and Tesla (TSLA) have also gained ground, with DJT up about 2% and TSLA up 6% on Friday.

However, investors are also showing some caution heading into Trump's second term. Wall Street has grappled for months with uncertainty about how Trump's trade and immigration policies will affect inflation. Economists generally agree that his tariff and deportation plans carried out as he's threatened would exacerbate inflation and force the Federal Reserve to keep interest rates elevated. Trump's advisors have assuaged some of the market's fears by suggesting he'll take a more measured approach than his campaign rhetoric implied. Nonetheless, markets could be volatile next week as Trump issues a torrent of executive orders.

The Republican trifecta in Washington—control of both chambers of Congress and the White House—that will be realized Monday is expected to usher in a raft of deregulation, tax breaks, and other business-friendly policies. However, the anticipation of Trump's tariff policies has led to an increase in implied volatility of 1-week expiry FX options, indicating that market participants see the event as a source of volatility for the FX market. This is evident in the rising implied volatility even after factoring in Monday's inauguration.

If Trump sounds more hawkish on tariffs than the latest headlines suggest, the dollar is likely to take another shot in the arm as Treasury yields rebound, which could weigh on equities, specifically stock futures, as the New York Stock Exchange will remain closed in celebration of Martin Luther King Day. However, whether any declines will be sustained will also depend on whether Trump will bolster the hype about extending corporate tax cuts, which is a supportive variable.

In conclusion, while investors are optimistic about the potential benefits of a Trump administration, such as deregulation and tax cuts, the uncertainty surrounding his tariff policies and their potential impact on inflation and market volatility is causing some investors to exercise caution. As Trump takes the oath of office, markets will be watching closely to see how his policies unfold and what impact they have on the economy and financial markets.