The Trump effect is 30% priced in, says Deutsche Bank analyst - here's why.

MW The Trump effect is 30% priced in, says Deutsche Bank analyst - here's why.

By Steve Goldstein

One of the big questions confronting markets is just how of the impact of a Donald Trump presidency has been priced even before it starts.

George Saravelos, head of currency research at Deutsche Bank, has an answer - and his methodology is as interesting as his conclusion.

What Saravelos does is generate a maximalist and minimalist scenario in terms of the policy mix - on fiscal spending, tariffs and immigration in particular.

The max Trump scenario would be 1% fiscal expansion, 50%+ tariffs on China and 10% universal tariffs from 2026, and a slowdown of migrant inflows within the first six months back to the levels of the first Trump presidency.

"Where would market pricing be under this scenario? Fed pricing at 5% or above, ECB at 1% or below, making for a 400bps spread," he says.

A business-as-usual situation, by contrast, would have the Fed/ECB gap at 100 basis points.

Right now, the market is pricing in about a 200 basis points gap, or a third of the probability of the maximalist view.

He says that 30% figure is consistent with other metrics, like inflation breakeven swaps and the U.S. dollar DXY. "The dollar is only pricing a 3% safe-haven premium on our models compared to a 10% maximum during the first trade war. The bottom line is the market is still not pricing a lot of Trump," he says.

Saravelos says he remains bullish on the dollar and said the euro falling to parity would be pricing the intensity of the Trump policy mix at closer to 50%, "with potential for even greater downside depending on what happens next year."

The euro $(EURUSD.FOREX)$ was trading at $1.0429 vs. the U.S. dollar, down 0.4% on the day after weaker-than-expected eurozone purchasing managers index data.

-Steve Goldstein

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November 22, 2024 06:02 ET (11:02 GMT)

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