How will Donald Trump's second term impact the ASX?

Donald Trump was sworn in as the 47th President of the United States on Tuesday and right from the get go, his team has reportedly prepared more than 100 executive orders to be implemented almost immediately.

Trump has already driven the US dollar sharply lower after officials said the administration will not roll out any tariffs on day one. This compares to expectations of a potential 10-20% universal tariff, a 25% tariff on Mexico and Canada, and a 60% tariff on China.

The US dollar index tumbled 1.2% overnight to 108.08, a fresh two-week low and marked largest one-day decline since November 2023. "We cannot rule out a near-term extension [of the dollar correction] when US financial markets fully reopen on Tuesday, but this looks more like a temporary setback for dollar bulls," says ING's Global Head of Markets Chris Turner.

The team at Axios have highlighted a vast majority of these plans, according to 122 Trump speeches, press conferences and interviews. You can check out their graphic and breakdown here.

Trump's immediate promises largely fall under three core themes, including:

1. Immigration: Nothing has shaped Trump's political identity more than his fight against illegal immigration, especially following the record surge in border crossings during President Biden's term.

2. Conservative culture: The second set of executive orders will aim to solidify the conservative culture wars that have been a central focus of Republican politics in recent years.

3. Big business: Trump has vowed to boost corporate American by slashing ten regulations for every new one introduced under the Biden administration, cutting taxes and impose sweeping tariffs on US trading partners.

With such a long list of policies and plans – what does this mean for the Australian sharemarket?

Currency, Inflation and Economic Growth

A strong US dollar. Trump's protectionist and inflationary policies are widely expected to strengthen the greenback. Since Trump's presidential victory, both bullish bets on the US dollar and the dollar's value have skyrocketed. The US Dollar Index is still up 4.3% since 5 November 2024 to a three year high. While derivative traders now hold approximately US$34.6 billion in bets that stand to benefit from a rising US dollar, the most since 2019, according to Bloomberg.

Citi analysed the ASX sectors that tend to move the most amid a falling US dollar. Their research was based on i) "Beta" measures how much a price moves relative to the market, with a low beta indicating the sector is less volatile and moves less than the Aussie and ii) "T-stat" assesses the strength and reliability of the relationship, with a high value suggesting the connection is unlikely due to chance.

Given the opposite is happening right now, the data suggests that sectors like Utilities, Real Estate, Staples and Healthcare tend to outperform.

"This is because both defensive outperformance and a falling Australian dollar typically coincide with economic uncertainty," the report said.

However, the overnight tumble may benefit sectors like Materials, Energy and Financials.

Source: Citi December 2023

Inflation risks. Annual US inflation is now forecast to rise to 2.7% in December 2025, according to the average forecast of 73 economists that answered The Wall Street Journal's quarterly survey. In October, the panel was expecting consumer prices to rise just 2.3%.

Rising inflation expectations has tempered global central bank easing expectations. The US Federal Reserve is now only forecast to make one 25 bp rate cut in 2025, compared to expectations of two cuts a month ago.

Encouragingly, the market is still pricing in at least three 25 bp rate from the Reserve Bank of Australia. But the bad news is that the market now expects fewer rate cuts this cycle, with the cash rate settling around 3.5% in the medium-to-longer run.

Economic growth. The US economy is forecast to grow faster this year than previously expected, according to the International Monetary Fund's projections last week. The report projected 2.7% GDP growth in 2025, up from previous estimates of 2.2%, driven by labour market strength, looser fiscal policy and an acceleration in investment. The upward revision in the US offset downward revisions in other major economies, including Europe.

Boost Domestic Oil Production

Trump's campaign pledge of "drill, baby, drill" is expected to materialise through executive orders aimed at boosting domestic energy production, even though output already stands at historic highs. According to ANZ analysts, his promise to help resolve the Russia-Ukraine conflict might involve easing certain restrictions to facilitate a peace agreement.

During his inauguration speech, Trump said he would immediately declare a national energy emergency to fill up strategic reserves and export American energy all over the world.

Brent crude is currently on a three-day losing streak, dragging its year-to-date performance from almost 10% to around 6.2%. This weakness may take some heat out of energy stocks, which have enjoyed a strong start to the year. The S&P/ASX 200 Energy Index is up 5% year-to-date to a three-month high.

Eliminate Support for EVs

Trump's agenda includes a strong pushback against Biden's electric vehicle initiatives, particularly the goal of having zero-emission vehicles comprise 50% of new car and truck sales by 2030. His proposed measures include reducing EV incentives, implementing tariffs on battery materials, and relaxing emissions standards.

Lithium stocks have only recently started to find a floor, with a bellwether name like Pilbara Minerals up almost 20% since late-December. The potential cuts to federal EV support could significantly impact both manufacturers and mining companies with existing supply agreements.

Potential Changes to Healthcare

The US is facing potential cuts to Medicaid and Affordable Care Act (ACA) subsidies, which may impact several healthcare names such as ResMed, CSL, Cochlear and Fisher & Paykel.

In the healthcare sector, proposed reductions to Medicaid and Affordable Care Act (ACA) subsidies could affect major players with substantial U.S. exposure, including ResMed, CSL, Cochlear, and Fisher & Paykel. Goldman Sachs reports that these companies generate over 40% of their revenue from the U.S. market. Their analysis suggests Cochlear is best positioned to weather potential healthcare funding pressures due to its limited market penetration, while CSL and ResMed face greater risk with their broader market presence and significant reliance on federal programs, accounting for 25-30% of their U.S. revenues.