How Australian markets reacted to Trump's inauguration

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The Australian share market showed a muted reaction to Donald Trump's inauguration as the 47th president of the United States on Tuesday, with the ASX-200 benchmark rising 55 points, or 0.66%, to close at 8402.

Utilities companies were the biggest losers, with AGL Energy (AGL) and Origin Energy (ORG) falling 1.44% and 2.32% respectively. This comes amid concerns Trump's expansive oil and gas policies could lead to more supply and cheaper prices down the track, potentially good news for consumers.

The S&P/ASX 200 Financials (XFJ) index, comprising banking, asset management, and insurance companies, led the market with a 1.25% gain for the day.

how the australian markets reacted to donald trump's second inauguration as US president

While US markets were closed due to a public holiday, futures tied to the S&P 500 rose 0.5%, while Dow Jones Industrial Average futures climbed 181 points, or 0.4%.

Historically, the S&P 500, a benchmark for US equities, tends to underperform on inauguration days. However, the past four inaugurations, including 2025, bucked the trend with market gains.

In contrast, Trump's first inauguration in 2017 initially caused uncertainty in Australian markets due to fears of isolationist policies. Joe Biden's 2021 inauguration saw a more favourable reaction, pushing the ASX to an 11-month high.

Trump says 'not yet' on tariffs

As Trump's first executive orders took shape, the world - particularly China, Mexico, and Canada - targets of tariff threats-held its breath.

While no new trade levies were imposed, Trump told reporters that he was thinking about 25% tariffs for the latter two nations from February 1.

Trump's tariff agenda remains a focal point for investors but might face constraints.

Shane Oliver, chief economist at AMP Capital, says "fiscally conservative House Republicans will hopefully keep a lid on Trump's populist tendencies, including tariffs."

Tariffs are likely to be ultimately less than the 10-20% general tariff and 60% on China as flagged during the campaign, according to Oliver. Many experts speculate such policies could lead to a global trade war.

For Australia, the direct impact of US tariffs is expected to be limited, given the trade surplus with the US and the fact that only 4% of Australian exports go to the US.

But since 35% of Australia's goods exports go to China, Oliver says indirect effects from tariffs on Chinese goods could significantly affect the local economy.

Uncertainty reigns

While investors may have enjoyed the initial bump in the markets, the outlook is tempered by longer-term uncertainty over Trump's policies.

Tim Murray, capital markets strategist at T. Rowe Price, points to potential benefits for small businesses and small-cap stocks from deregulation and tax cuts.

"There may also be significant pent-up economic activity released now that election uncertainty has been removed."

However, Murray cautioned that current high equity valuations could face pressure if US earnings expectations for 2025 fall short.

Monica Defend, head of Amundi Investment Institute and chief strategist, has similar concerns.

"We think liquidity in markets is ample, credit conditions robust, and the profit environment reasonable. But the most important factors preventing us from significantly raising our risk stance are valuations and risks to earning revisions."

Overall, Oliver says Trump's agenda includes some pro-market aspects - with tax cuts and deregulations - but some negative aspects - notably around tariffs and immigration.

"[The] market impact will ultimately depend on what dominates," he says.

Questions over inflation and rate cuts

Trump's plans are also widely expected to rekindle inflation, creating challenges for monetary policymakers globally, including the Reserve Bank of Australia (RBA).

In the US, Murray expects a much more cautious approach from the Federal to rate cuts in 2025, with only one or two more cuts likely.

"Inflation has already proven somewhat sticky in the latter half of 2024, and the Fed is aware of the potential inflationary impacts of Trump's campaign promises. They will probably need clear evidence that inflation is sustainably falling again before they are willing to go below 3.75%."

The RBA, which has maintained the cash rate at 4.35% throughout 2024, faces similar challenges. With its next meeting scheduled for February 17-18, market participants are split on whether a rate cut is imminent.

Currently, around 70% of financial market traders expect a rate cut at that meeting, aligning with the view of economists from ANZ and CommBank, while NAB and Westpac expect the first cut to happen around May.

However, if Trump's policies prove inflationary, the ripple effect could delay monetary easing in Australia.

This scenario is not lost on Australia's central bank, with RBA deputy governor Andrew Hauser saying in November that officials will monitor such potential risks.

"That is what we at the RBA will do, factoring that assessment into our overall policy judgements in the months ahead."

Murray advises investors to hedge against inflation risks, suggesting "they may want to consider adding exposure to asset classes such as natural resources equities that historically have responded well to higher inflation."

Crypto's new chapter

The Trump administration's pro-crypto stance, vowing to make the US the "crypto capital of the planet," is poised to reshape the digital asset landscape. Key promises, such as establishing a strategic reserve of Bitcoin, despite it having no intrinsic value, signal unprecedented institutional confidence and commitment to cryptocurrencies.

This follows moves in Australia such as AMP, a superannuation fund, allocating Bitcoin to its portfolio mix in December.

Adding to the frenzy, President Donald Trump launched his own meme coin, $TRUMP, which stirred both excitement and controversy.

Debuting on Friday night, $TRUMP skyrocketed from under $10 on Saturday morning to a peak of $74.59 before settling at $33.88 by Monday. Despite its soaring market value of over $10 billion, the token has drawn criticism from experts who label it unethical and predatory.

Even so, James Quinn-Kumar, director of community engagement at Binance Australia and New Zealand, believes these developments could accelerate progress in the crypto sector by 2025, though the timeline remains uncertain.

In Australia, regulators are also stepping up. ASIC recently released proposed updates to its digital asset guidance (INFO Sheet 225) for industry consultation. The revisions aim to clarify whether certain digital assets qualify as financial products and fall under regulatory oversight. Binance has pledged to contribute to this process.

"Binance is committed to a regulated and transparent framework that protects consumers and fosters innovation," says Quinn-Kumar.

A volatile road ahead

While markets have been generally positive in the aftermath of Trump's inauguration, experts agree that the road ahead may be turbulent.

Regardless of which party wins, Australia's market tends to perform well in the first year. Looking at the past 10 cycles, the trend in the first year has been mostly positive, with eight years up and only two either flat or down.

But with so much about this administration that's unprecedented, and like all investments, nothing is guaranteed.

As Oliver notes, the next four years could be a "volatile ride for investors".

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Ryan Johnson is a journalist at Money. He's previously worked covering the Australian and New Zealand mortgage and banking industries. He has also written on superannuation, insurance, and personal finance. Ryan has a Bachelor of Communication (Journalism) from Curtin University, Perth. You can connect with him on LinkedIn.