Amid a storm of executive orders, unscripted remarks and social media posts, investors are working hard to separate the signal from the noise in Donald Trump’s America. Setting English as the official language seems easy to ignore, but Friday’s on-camera blow-up with the visiting Ukrainian leader confirms that we are entering very different times.
Trump has upended basic assumptions that investors held barely six weeks ago when he took office. The latest market sag is easier to explain from a combination of weaker consumer sentiment and persistent inflation. But for investors looking further ahead at European security, North American free trade or the US Constitution, there is a grim realisation that the ground beneath their feet is shifting fast.
In Europe, most dramatically, Trump has all but switched sides in the Ukraine conflict. He is strong-arming Kyiv into a peace deal, whitewashing Russia’s responsibility for its attack and handing responsibility for reconstruction and future defence to beleaguered Europeans.
Weirdly, Europe’s financial markets have outperformed the S&P 500 since Trump took office on a combination of cheap valuations and delays in US tariffs. Germany’s elections have now placed a more coherent government in power with a fresh plan for €200bn in military spending that sent defence stocks soaring. Any relaxation in sanctions on Russia also opens the prospect for a return to cheaper energy supplies, lower inflationary pressures and faster rate cuts.
But investors have not yet fully absorbed the significance of America’s dwindling commitment to European security. Europe faces enormous costs of rebuilding Ukraine and bolstering its own defences against a Russian government that remains fundamentally hostile. With US tariffs still looming, Europe can’t count on a coordinated effort with Washington to resist China’s enormous manufacturing surplus. And when the next financial crisis hits Europe, the odds of a swift and unconditional deployment of dollar liquidity by the Federal Reserve are no longer guaranteed.
Investor expectations and tariffs
Closer to home, the administration has upended longstanding investor expectations about the free trade area that extends from the Yucatan to the Yukon. Trump signed the US-Mexico-Canada Agreement in his first term but still believes that bilateral trade deficits are proof that America’s neighbours are cheating. His relentless attacks on Canada and Mexico since taking office have surprised economists and diplomats alike, even setting aside the strange talk of annexing Canada outright.
Just last week the president insisted that 25% tariffs would go into effect on 4 March as threatened, although we will see if last-minute manoeuvres in Ottawa and Mexico allow further delays. Either way, what is clear is that the USMCA, which was scheduled for review next year, is already effectively under full-scale renegotiation.
Pressures were already growing to crack down on Chinese goods avoiding tariffs by shipping through USMCA partners. Congress has also sounded an alarm over Mexican legal reforms that may undercut commitments to labour, environmental and trade standards. But now it’s clear that investors and manufacturers need to start pricing in more barriers and higher costs for crucial supply chains that often cross North American borders many times before they produce a final product.
Finally, there’s all this vague and nefarious talk of a looming ‘constitutional crisis’. It’s easy to dismiss these concerns as the ravings of defeated Democrats who have yet to shape a coherent strategy in opposition. And yet, some questions still need answers. Can the president really cut programmes and close departments that Congress has funded? Will he really follow through on firing civil servants whose status is protected by law? What does it mean that he has installed more politically loyal military leaders?
US politics
Far more salient for investors are questions around a Justice Department and Federal Bureau of Investigation now led by the president’s closest political allies. Investors have largely welcomed Trump’s appointments at the traditional market regulators, but the sudden gutting of the Consumer Financial Protection Bureau still sets a worrying precedent. Treasury Secretary Scott Bessent seems to have the right instincts on Fed independence after all, but he has yet to show that he has any influence over tariffs, budget or Elon Musk.
America’s borrowing costs are still going to be determined overwhelmingly by expectations for growth and inflation, even as the balance between supply and demand will set yields at different tenors. But the corrosion of America’s checks and balances, the weakening of independent regulators and the political agendas of law enforcement hardly make the US a more attractive place to invest. It’s far too soon to raise worries about the dollar’s reserve status, but investors will be watching closely for anything that undermines trust in American institutions.
These concerns may seem like so much hyperventilating against the backdrop of a global economy that remains mostly robust, but Trump clearly intends to make changes to America’s institutions and its foreign relations that will reshape investors’ assumptions. And if the first month-and-a-half is any guide, there’s much more to come.
Christopher Smart is Managing Partner of Arbroath Group and writes the ‘Leading Thoughts’ column on Substack.
This is an edited version of a Substack article.
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