The main event in November was the US presidential election. Donald Trump's election for a second term was greeted with dismay by many, but not by the markets. With the Republicans taking control of the Senate and House of Representatives, President Trump will have the power to make real changes in his first two years. Equity markets surged in the belief that Trump's policies would be pro-growth.
Trump moved quickly to appoint his cabinet. The most intriguing thing is the appointment of Elon Musk and Vivek Ramaswamy as co-heads of the new department of government efficiency or Doge. Followers of Musk on X will know he has highlighted many areas of potential savings. Given their two massive egos, many wonder if Musk can work with Trump. Furthermore, detractors point out that making changes in the public sector will be much more difficult than in the private sector. It will be fascinating to see how this plays out. Something, however, must be done. With government spending of $6.8tn far outstripping income of $4.9tn, debt is growing rapidly and stands at $32tn. The rate of borrowing increases is likely to accelerate as cheaper debt issued in the low interest rate era matures and is refinanced at higher rates. The interest bill will balloon. A market nervous about this rapidly increasing burden could respond positively to any moves to reduce the deficit. The prize for success will be massive. Suppose Trump's government does not reduce the size of the deficit. In that case, this is the most significant risk to US financial markets. Treasury bond yields above last year's high of 5 per cent would not be good.