Citi breaks down 4 sequences of Trump trades

Investing.com -- Following Donald Trump’s victory in the US presidential election last week, Citi strategists have segmented "Trump trades" into four distinct sequences based on anticipated policy moves under the new administration.

The first sequence revolves around the “pure sentiment trade,” strategists note.

“Following election night, market sentiment has been very positive, and this is likely to continue into year-end,” they added. The optimism comes due to the absence of Harris-led tax increases and expectations of corporate tax cuts under Trump.

According to Citi, this phase is primarily bullish for US equities, benefiting from seasonal strength into year-end. Citi’s recommendation is to remain long on the S&P 500 as “this position will likely work into year-end, as it benefits from good seasonals in November and December.”

Deregulation forms the second phase, focusing on actions that do not require Congressional approval. Citi anticipates changes in areas like energy, M&A regulation, and cryptocurrency, driven by new leadership at key agencies.

While these policies may boost sentiment, the report cautions against assuming small-cap outperformance due to deregulation, citing limited historical evidence.

Immigration policies dominate the third phase. Stricter border controls and mass deportations are central to Trump’s agenda, underscored by key appointments such as South Dakota Governor Kristi Noem and former ICE Director Tom Homan.

According to Citi, immigration has historically exerted a deflationary effect through labor supply expansion, outweighing inflationary demand pressures. While the scale of deportations remains unclear, past Obama-era removal numbers of 700,000 annually did not significantly impact inflation.

In light of this, strategists take a cautious stance, avoiding breakeven trades linked to immigration policies due to their uncertain market effects.

The next sequence centers on tariffs, a hallmark of Trump’s first term, but strategists expect a more accelerated timeline this time. Initial narrow tariffs targeting China could impact markets as early as February or March.

They believe that being long USDCNH is “likely to be the best trade” in this phase, noting that tariff announcements historically lead to currency weakness.

Broader tariffs, potentially part of a fiscal reconciliation bill, might follow later but remain uncertain in scale and timing. In this scenario, the euro could face additional pressure, and Citi maintains its short EURUSD position.

Finally, expansionary fiscal policy represents the last phase. While this could include tax cuts and infrastructure spending, Citi highlights substantial uncertainty surrounding implementation.

The potential for higher yields and tighter swap spreads emerges as a trade idea tied to fiscal slippage, though the report advises patience, given the likely delay in fiscal stimulus impact until 2026.

“This suggests that the potential steepening of the curve would also only be a trade for later in 2025,” strategists explain. “We therefore have not come back to our earlier curve steepeners.”

In its analysis, Citi’s team also delved into the 2017 and 2018 dollar performance under Trump, concluding that the earlier delay in tariffs weakened the dollar in 2017. However, Citi views 2018 as a better template for 2025, with stronger dollar performance expected if tariffs are implemented promptly.

Source: Investing.com