Weekly Buzz: Tariffs, Elections, and Market Divergence – What's in Store for 2025?

As we wrap up the week, let's take a look at some of the key events and trends that could shape the global economy and financial markets in 2025. From geopolitical events and trade policies to market divergence and election outcomes, there's a lot to unpack.

First, let's talk about the recent geopolitical events and trade policies that have impacted the global economic outlook, particularly for emerging markets. In late November 2024, President-elect Trump announced plans to impose a 25% tariff on products entering the U.S. from Canada and Mexico. This announcement raised concerns about potential disruptions in global trade and supply chains, which could negatively impact emerging markets heavily reliant on exports to the U.S. (Capistran, 2024).

Mexico, in particular, is heavily exposed to U.S. tariffs, with the country trading 40% of its GDP with the U.S. and sending more than 80% of its exports to the U.S. (Capistran, 2024). If tariffs were introduced, the Mexican peso would likely be the first shock absorber, falling nearly the same amount as the tariff rate. This could lead to a decrease in Mexico's trade surplus with the U.S., which has doubled since 2015 to 8% of GDP (Capistran, 2024).

Another geopolitical event that could impact emerging markets is the U.S. election in 2025. The outcome of the election could lead to changes in trade, immigration, fiscal, and regulatory policies, which could significantly influence outcomes in the U.S. and elsewhere (Malik, 2024). The combination of less synchronized business cycles and central bank paths globally, heightened geopolitical uncertainty, and evolving government policy agendas are introducing unusual complexity to the outlook, requiring a flexible approach to investing (Malik, 2024).

Now, let's discuss the potential implications of the U.S. election results on the financial markets, both domestically and internationally. Based on the information provided, the U.S. election results could have significant implications for the financial markets. The election results could lead to changes in U.S. trade, immigration, fiscal, and regulatory policies, which could impact various sectors of the economy and, consequently, the stock market. For instance, a shift in trade policies could affect companies with significant international operations or supply chains (Source: Hussein Malik).

The election results could also influence market sentiment, with certain companies being perceived as winners or losers. For example, in the aftermath of Trump's victory, Tesla and Palantir were associated with positive sentiment, while Meta was associated with negative sentiment (Source: November 09, 2024).

The election results could also impact interest rates, with policy rates in developed markets potentially remaining higher for longer. This could affect bond yields and, consequently, the performance of fixed-income investments (Source: A year of divergence: The market and economic outlook for 2025).



Lastly, let's explore how the divergence in policy rates between developed markets and emerging markets could influence currency movements and investment decisions. The divergence in policy rates between DM and EM can significantly influence currency movements and investment decisions. Higher interest rates in DM, such as the U.S., tend to attract capital flows, leading to an appreciation of the DM currency. Conversely, lower interest rates in EM can lead to capital outflows, causing the EM currency to depreciate. This divergence can lead to significant currency movements. For instance, in 2024, the U.S. Federal Reserve kept benchmark interest rates unchanged at 4.25-4.50%, while the European Central Bank (ECB) cut rates, leading to a divergence in policy rates. This divergence can impact currency movements, with the U.S. dollar potentially strengthening against EM currencies.

The divergence in policy rates can also influence investment decisions. Higher interest rates in DM can make investing in DM bonds more attractive, as they offer higher yields. Conversely, lower interest rates in EM can make investing in EM bonds less attractive. However, this can also create opportunities for carry trades, where investors borrow at low interest rates in EM and invest in higher-yielding DM assets. For example, in 2024, investors might have been attracted to U.S. bonds due to higher yields, while EM bonds might have been less appealing due to lower yields.

In conclusion, the recent geopolitical events and trade policies have created uncertainty and potential risks for emerging markets. The impact of these events on the global economic outlook, particularly for emerging markets, will depend on how governments and central banks respond to these challenges. The U.S. election results could have significant implications for the financial markets, both domestically and internationally. The divergence in policy rates between developed markets and emerging markets can significantly influence currency movements and investment decisions. As we move into 2025, investors should closely monitor these developments and adjust their portfolios accordingly.