Wow! What a day in the markets with the Trump trade roaring in the FX space, bond space, and equity space. Buying U.S.-based equities in spread to, for example, Germany and China has yielded significant profits for us. The unrest in both China and Germany makes Trump’s victory particularly ill-timed for those markets in several ways.

So far, there has been no major response from China regarding the results, but Chinese markets are clearly reacting negatively. It is worth noting that China has hinted at potentially introducing more stimulus should Trump win, which means market expectations for significant policy measures from China are rising. However, it is likely that these expectations will be met with disappointment this week.

I am personally not convinced that Trump is worse for China than Kamala Harris would have been, but I acknowledge that it will take time to reach a definitive conclusion in practice.

While the Chinese government is largely staying silent and refraining from commenting on the election results, it is clear from notes and statements in state-run media that they are not pleased with Trump’s election. Although the Biden-Harris administration mostly continued Trump’s China policies, including trade tariffs on Chinese goods, the rhetoric under Trump is anticipated to be stronger.

On the other hand, China might see openings for diplomatic maneuvering. The Biden administration was notably active and successful in building alliances with neutral Global South countries, particularly in Southeast Asia. The previous Trump administration lacked the organization and focus for such efforts. If a similar situation recurs, it could create opportunities for China to re-engage diplomatically with countries like the Philippines, Thailand, and Vietnam.

This time around, we expect Trump to arrive in Beijing with a list of demands, potentially including direct foreign direct investment (FDI) into U.S. electric vehicle (EV) supply chains as a condition for avoiding import tariffs. While there is a possibility of a deal, it will take time for the market to interpret the situation this way. For now, the outlook remains cautious.

Last week, China communicated via Reuters that a Trump victory would prompt a more significant response during the NPCSC meeting this week. However, we doubt they will dare to deploy major measures, as USDCNH is now trading aggressively higher. China took advantage of the window of opportunity created by the Fed’s 50bp cut to ease fiscal and monetary policy, but the current strength of the USD limits their ability to stimulate further, due to concerns over a weak CNY.

The bottom line: avoid Chinese longs at all costs for now and consider leaning short in metals with links to China, particularly Copper.

Chart 1: China cannot ease as long as the USD is trading strong

Meanwhile, there is turbulence in what was once the most stable political environment in Europe: Germany. This marks the end of Germany’s coalition government. Chancellor Olaf Scholz has dismissed Finance Minister Christian Lindner, shattering the already fragile alliance. The traffic light coalition, strained to the breaking point, now faces deep political chaos. With a confidence vote looming on January 15, Scholz braces for a showdown that could lead to his downfall. If he loses, the President may dissolve parliament and call snap elections, in which all three coalition parties are expected to perform poorly. Public discontent with the coalition has been simmering for some time. DAX futures are showing limited reaction, ticking slightly downward.

We are on Bund watch in the coming days, with the AfD trending around 20% in opinion polls. Recall how French bond markets were spooked during Macron’s snap elections after the EU elections and how French equities weakened due to outflows, especially from Asian accounts. Germany risks facing a similar situation, and our primary bet is currently to be long US stocks versus German stocks accordingly.

The Bund ASW package is trading as if there’s a significant liquidity squeeze in Bunds, while the shape of the curve suggests that additional liquidity might soon be necessary. The ECB will likely face a major test soon, but they remain focused on increasing QT efforts by year-end, which seems out of step with what the markets are beginning to signal

Chart 2: German Bunds are trading extremely poorly at the moment