The Republican Party has all but secured a decisive victory in the U.S. elections, securing the presidency and control of both the Senate and House of Representatives. Early results show former President Donald Trump leading with 292 electoral college votes, outpacing his opponent by nearly five million in the popular vote. With major U.S. media outlets already calling the Senate for Republicans, who are projected to secure at least 52 seats, the outcome indicates a broad mandate for the GOP’s ‘America First’ agenda. This political shift has sparked significant movements in global financial markets, where the initial Republican victory spurred a rally in U.S. equities, a steepening yield curve, and a strengthening of the U.S. dollar (USD).
Market Reaction to Republican Win
The election outcome has driven rapid shifts across asset classes. U.S. Treasury yields rose sharply, with the 2-year yield climbing to 4.27% and the 10-year to 4.40%, reflecting investor expectations of pro-business policies and potential increases in government borrowing. These developments are contributing to a steepened yield curve as investors anticipate a more aggressive fiscal approach, including tax cuts and reduced regulations.
U.S. equity markets also surged on news of the election results, with the Dow, S&P 500, and Nasdaq each posting gains of 2-3% as investors showed confidence in Republican promises to boost corporate growth and curtail regulations.
The currency markets reacted strongly as well, with the USD climbing against the Japanese yen and most European currencies. While the New Zealand dollar (NZD) has shown resilience, trading at 0.5960 USD after an initial drop, the strengthening USD could pressure the NZD further if the new U.S. administration’s policies widen yield differentials between the two countries.
Cryptocurrencies, often seen as a hedge against inflation and economic uncertainty, have also rallied. Bitcoin surged above USD $75,000, setting a new record high, as market participants anticipate heightened fiscal spending and potential inflationary pressures under a Republican administration.
European equities, however, slipped on the news, with major indices such as the Euro Stoxx 50, DAX, and FTSE 100 showing declines amid concerns over heightened U.S.-EU trade tensions.
Projected Policy Changes as “America First” Agenda Revisited
The election outcome has paved the way for a renewed “America First” approach, with policy moves that could disrupt global trade and prompt retaliatory measures from key trade partners. This stance is likely to bring about larger fiscal deficits as Republicans pursue tax cuts and possibly higher spending in defence and infrastructure. The administration’s emphasis on tariffs has already dampened European market sentiment, with many bracing for potential trade friction in the months ahead. Analysts expect a renewed focus on domestic manufacturing and less favourable immigration policies, signalling potential constraints on labour availability in the U.S.
This shift could also reshape climate policy. The Republican-controlled government is likely to scale back on federal climate initiatives, an area where the U.S. had previously shown international leadership. The implications could be far-reaching, impacting global climate goals and potentially shifting the momentum away from international climate agreements.
Implications for New Zealand’s Economy and Financial Markets
For New Zealand, as a small, open economy, these U.S. policy shifts present unique challenges. The NZD, which has already weakened in the wake of the Republican victory, may face further downward pressure as the USD strengthens. Rising U.S. yields tend to attract global capital flows, which could drive up New Zealand’s own bond yields in tandem. In fact, local yields rose by 8-10 basis points across the curve following the election results, reflecting shifts in global yield expectations.
A stronger USD and higher yields globally could impact New Zealand’s export economy. The America First agenda and anticipated trade restrictions may reduce demand for goods on the global market, potentially weighing on New Zealand’s exports.
The Reserve Bank of New Zealand (RBNZ) is likely to keep a close eye on these developments. With domestic growth slowing and cooling trends in the labour market, the RBNZ may consider easing monetary policy to cushion against external pressures, with some analysts forecasting a 50 basis-point cut to the Official Cash Rate (OCR) in November.
Cooling New Zealand Labour Market and OCR Outlook
Recent New Zealand labour market data showed signs of cooling, with employment down by 0.5% in Q3 and a lower workforce participation rate at 71.2%. The unemployment rate rose to 4.8%, marking the highest level in four years, while wage growth also moderated. These signals of a cooling labour market are likely to reinforce the RBNZ’s stance on easing, with lower interest rates potentially required to support domestic growth and prevent further economic slowdown.
Meanwhile, inflation expectations may also be influenced by the international economic landscape. Should the USD continue to strengthen, import costs could rise, exerting upward pressure on inflation, while a stronger USD would also affect New Zealand’s export competitiveness.
Global Central Banks’ Responses Amid Political Shifts
The Federal Open Market Committee (FOMC) is expected to cut the Fed Funds rate by 25 basis points tomorrow, a widely anticipated move that could provide temporary relief to the USD. However, longer-term easing is expected to continue through 2025 as the Fed balances growth and inflation risks under the Republican administration’s pro-growth stance. Other central banks are also expected to adjust their policies in response to these developments, with a 25-basis point cut anticipated from the Bank of England, and a varied response from the European Central Bank as economic conditions diverge across the Eurozone.
What’s Next?
The Republican victory in the U.S. has set the stage for significant changes in global financial dynamics. While U.S. equities and the USD have reacted positively, the America First policy direction raises concerns over trade frictions and inflationary pressures. For New Zealand, the impact of U.S. policy shifts will be deeply felt, with the potential for a weaker NZD, rising yields, and economic adjustments in key export sectors.