U.S. Treasury Nominee's Impact on Global Markets

 

On November 22nd local time, the billionaire Besent, who once served as the Chief Investment Officer of Soros Fund Management, was nominated for the position of Secretary of the Treasury. Following the announcement, the market swiftly shifted from the previously sustained "trade" to the "Besent trade."

The analyst team at Rabobank wrote in a research report: "Besent is a successful macro hedge fund manager who tends to reduce the U.S. budget deficit to 3% of the Gross Domestic Product (GDP). The news of him being the top choice for the next U.S. Treasury Secretary increases the possibility that some 'trades' will be toned down."

Besent's "3-3-3" Policy

The position of the U.S. Secretary of the Treasury is considered one of the "four most important positions in the U.S. Cabinet" besides the Vice President, responsible for advising on economic and fiscal matters and ensuring the stability of the government bond market. Previously, it was stated that among all the candidates for Treasury Secretary, Besent is more trusted and believed to be more capable of implementing the government's new policies. "Besent is respected by all and is one of the most important investors and geopolitical economic strategists in the global market. He will help me lead the United States into a new golden age."

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Over the weekend, in his first interview after being nominated, Besent stated that his policy focus would be to fulfill various tax cut promises, including making the tax cuts implemented during the first term permanent and eliminating taxes on tips, social security benefits, and overtime pay. He also said that he would focus on advancing tariff policies and cutting spending while "maintaining the status of the U.S. dollar as the global reserve currency."

In short, his policy is the "3-3-3," which aims to reduce the budget deficit to 3% of GDP by 2028, achieve 3% GDP growth through deregulation, and increase daily oil production by 3 million barrels or an equivalent amount of energy.

Specifically, in terms of economic growth, Besent advocates for achieving a 3% real economic growth target through deregulation, expanding U.S. energy production, and controlling inflation. He emphasized, "This is to allow the private sector to take over and replace the currently bloated government spending." He added that government policy orientation has suppressed the willingness of private investment.

In terms of controlling the deficit, Besent said that he would urge to "publicly state the hope to reduce the deficit to 3% of GDP by the end of the term." "He did not let the deficit reach 6% or 7% of GDP; the federal budget deficit averaged 4% of GDP during his first term, and he aims to reduce it to 3% during this term." He stated.

In the field of energy policy, Besent sees increasing crude oil production as a key means of curbing inflation expectations, advocating for an additional 3 million barrels of oil or an equivalent amount of energy production per day.

In terms of tariff policy, Besent tries to downplay trade threats. Faced with market concerns that comprehensive tariffs may trigger a trade war and ultimately lead to higher prices for American consumers, he responded that tariff threats are a negotiating strategy aimed at obtaining concessions from other countries, "Tariffs are the starting point for negotiations with trade partners."

The market quickly shifted to the "Besent trade."

Based on Besent's first statement and trust in him, the market expects that fiscal policy in the 2.0 era is likely to adopt a gradual approach and actually implement tariff policies in stages, alleviating the impact of the promised more radical trade and economic policy proposals on the market.

Greg Peters, co-chief investment officer of PGIM Fixed Income, a major asset manager, said, "The market was very worried about a more extreme candidate, and Besent is capable and qualified, considered the 'adult in the room,' and the market really likes him." Shaun Osborne, chief currency strategist at Scotiabank, said, "Besent is seen as potentially having a moderating influence on the policies of the new U.S. government. For example, he supports gradual tariff policies."

The U.S. dollar and cryptocurrencies immediately reversed last week's gains and fell on Monday. The U.S. Dollar Index, which measures the value of the dollar against six major currencies, ended its strong rise since the end of September, falling 0.6% to 106.89, and at one point recorded the largest drop in more than two weeks. Previously, the dollar was the main beneficiary of the "trade," having risen more than 7% from the beginning of last month to last Friday. Bitcoin, also a major component of the "trade," continued its weekend decline on Monday, falling below $94,000. Ethereum, on the other hand, was relatively strong, rising by 3.9% to around $3,500, but it also followed Bitcoin's decline afterward. Blockchain-related stocks varied. Major Bitcoin holder MSTR fell by more than 4%, TeraWulf fell by more than 6%, and BTCDigital fell by more than 8%. Cryptocurrency exchange giant Coinbase rose by about 2.5%, BeyondInc. rose by more than 9.4%, and AppliedDigital rose by more than 8.4%. The Ethereum ETF FETH rose by 6.65%.

Gold also fell due to Besent's nomination and the news that Israel may reach a ceasefire agreement with Hezbollah in Lebanon within days. According to FactSet data, gold spot prices fell by 3.44% to $2,616.80 per ounce after Besent's nomination. Nicky Shiels, head of metal strategy at precious metals broker MKS Pamp, said, "The gold price fell by about $100 on the 25th, with a scale and speed as severe as the sell-off after November 6th. The potential improvement in the Middle East situation and Besent's appointment are key factors in the gold sell-off."

U.S. stocks and bonds rose in tandem. The S&P 500 and Dow Jones Industrial Average both hit record highs during the session and ultimately closed higher. U.S. bonds became the biggest winner under the "Besent trade." Previously, due to a series of unexpectedly strong U.S. economic data, the market worried that his policies would trigger reflation, leading to a reduction in expectations for Fed rate cuts and turning the five-month rally in U.S. bonds into a two-month selling spree. On the 25th, U.S. bonds experienced one of their strongest trading days in recent months. The 10-year U.S. Treasury yield fell by 14 basis points to 4.27%, one of the best performances this year. Yields on U.S. bonds of several other maturities also saw double-digit basis point declines.

This is partly due to market expectations that Besent will follow fiscal discipline more closely, not allowing the U.S. fiscal deficit to deteriorate excessively. Besent once stated that the current U.S. Treasury Secretary Yellen overused Treasury bills to fund the government. On the other hand, Besent also strongly eased market concerns about reflation. "There are some very good ideas, but I assure you, the last thing he wants to do is cause inflation. I think the bond market is not worried about 2.0 version inflation; what the market will see is healthy measures that bring more economic growth momentum," he said in the aforementioned interview. "If you combine price adjustments with all the other anti-inflammatory measures mentioned, we will achieve the 2% inflation target desired by the Fed."

Paul Donovan, chief economist at UBS Global Wealth Management, said that having at least one important member of the cabinet opposed to the continuous imposition of trade taxes is a good thing for the market. Vincent Chaigneau, head of research at Generali Investment Management, believes that nominating Besent indicates that the most inflationary policies, including tariffs, may not be pursued "full force."

How will it affect the global market?

The market generally believes that Besent's nomination will support the continued rise of U.S. stocks. Susannah Streeter, head of funds and markets at Hargreaves Lansdown, the UK's largest retail trading platform, said in her research that the choice of Treasury Secretary further inflates investor sentiment, and Wall Street seems to be on the verge of a new round of stock market gains. "Besent's long-term market experience has strengthened investor confidence in the pro-business policies that the new government is about to introduce, and raised hopes that any tariffs will be highly targeted and that core inflation will remain at lower levels."

Carol Schleif, chief investment officer at BMO Family Office, said, "Besent understands many different asset classes and will help maintain a very sensitive attitude to market reactions." Tom Lee, head of research at U.S. investment firm Fundstrat Global Advisors, said, "Besent has provided considerable economic and market credibility to the incoming cabinet. This has reinforced the market's view of the 'put option,' that is, the new government wants U.S. stocks to perform well."

At the same time, unlike the previous "trade" where the rise in U.S. stocks was concentrated in specific sectors, the market's rise on the 25th expanded. The market expects that under the "Besent trade," the breadth of U.S. stocks will increase, and in addition to large-cap stocks, small-cap U.S. stocks are also expected to see a wave of gains. Lee said that Besent's support for the economic agenda will benefit smaller, domestically oriented companies. The Russell 2000 small-cap index rose by 1.47% on Monday, marking its sixth consecutive trading day of gains, closing at a record high and breaking the record set in 2021.

The market also expects that Besent's nomination will continue to benefit the U.S. bond market. The analyst team at Rabobank wrote in a research report, "Besent, as a successful macro hedge fund manager, tends to reduce the U.S. budget deficit to 3% of GDP, which clearly indicates that he is not very willing to adopt excessive deficit spending policies." Scott Spratt, a strategist at Societe Generale Corporate and Investment Banking, also said, "The market's view of Besent as a 'prudent candidate' may prompt a rebound in U.S. Treasuries." He also expects that Besent advocates for the phased implementation of some policies and believes that the levels of some policies currently being discussed are too radical, which may also provide short-term support for the Asian foreign exchange market.

However, for the longer-term impact on the U.S. dollar, the market believes that caution is still needed. For example, not long after the dollar turned down on the 25th, according to CCTV news, on the local time of the 25th, the U.S. President-elect stated that he would impose a 25% tariff on all products entering the United States from Mexico and Canada. In addition, he also announced an additional 10% tariff on Chinese goods. The U.S. Dollar Index quickly rose by 30 points, breaking through the 107 mark, and non-American currencies fell across the board. Among them, the dollar against the Mexican peso once rose by more than 2%, and the dollar against the Canadian dollar rose by 1.2%. The offshore renminbi against the U.S. dollar also fell by about 0.3%, touching a low of 7.2722, the lowest in four months. Skylar Montgomery Koning, a foreign exchange strategist at Barclays Bank, said, "Besent's nomination once caused the dollar to fall, but I think this is just a temporary retreat after a rapid fluctuation, not a directional change. In any case, the tariff policy is coming, which is still favorable to the dollar."

The market needs to be more cautious about the "Besent trade" as a whole. Although Besent has hinted in the past that he may adopt a more balanced approach to implementing trade tariffs, the market should not overinterpret this nomination because the Treasury Secretary "is not the person who designs the details of the trade tariff implementation strategy." Under the government, the Treasury Secretary will not ultimately drive policy; only the President can drive policy.