Donald Trump's victory in the American presidential election has had tangible initial effects on financial markets. The dollar has strengthened, the US stock market has risen against others, interest rates have gone up, Bitcoin is breaking records. These "Trump trades" are likely to continue for a while longer. Bullishness may actually increase further as the president-elect unveils plans which are seen as business-friendly. Not least the currency movements can be large, if carry trades pick up new momentum.

But Trump's economic policy – as presented during the election campaign – contains conflicts and contradictions, which at some point in the future may burst into full bloom. For instance, the announced US tariff increases will push up prices, harm American consumers and make exports more difficult for foreign companies.

The EU will try to fine-tune a response that persuades the negotiator Trump to back down from some of the threats. The effect of new US tariffs may also be dampened in the short term by the weakening of both the euro and the krona against the dollar. Furthermore, European companies may alleviate the effects by improving competitiveness versus Chinese companies which will be hit even harder by the trade war.

Nonetheless, inflation in the United States is still likely to rise in the long run, as increased tariffs drive up import costs and deportation of immigrants creates bottlenecks and rising wage costs.

Higher inflation and rising budget deficits will keep US market interest rates higher than previously expected. A clear uptick has already taken place, due to rising concerns about future inflation and borrowing costs. Sooner or later, creditors will start to worry, and US Treasury yields may rise sharply – which in turn could exacerbate budget problems and at the same time result in an even stronger dollar. Also, higher interest rates will hurt valuations of companies in growth sectors.

This would not go down well with the President, as Trump has clearly said that he wants a weaker dollar. In that situation, an acute conflict could flare up between the Federal Reserve on the one hand and the Trump administration on the other. A battle between the White House and the Fed could cause widespread turbulence in the financial markets. The optimism of the "Trump trades" can then be turned into its opposite – turbulence and falling markets.

Thus, the situation is fluid and uncertain. We don't know the details of President Trump's coming proposals and where his red negotiating lines may be. To what extent the EU will be able to respond to Trump's tariff threats in a measured and concerted way is also unclear as the member countries are disunited and the two previous leaders – France and Germany – both experience political crises.

At the same time, it is impossible to foresee when and to what extent bond market vigilantes will start to worry about the American budget deficit, or how that may affect the dollar exchange rate.

We conclude that the bulls will dominate for some time yet, but the risks of stretched valuations and negative repercussions from bond markets will increase as we enter 2025 and the new administration starts to unleash its policies.