Post-rally Trump trade is over. Will central banks implement another rate cut before the year end?
- Claire Linh Nguyen
- Nov 21, 2024
- 5 min read
What do we need to know for the week ended on 15th Nov 24
💡 Highlights 💡
Post-rally Trump trade is over. White House picks and the Fed hawkish announcement has heavily affected global equity market.
UK economy barely grows with Budget fears blamed. The economy slowed over the three-month period, growing by just 0.1%, and shrank during September itself.
The European Central Bank (ECB) minutes reveal strong indications of a 50 basis point rate cut in December 2024, reflecting policymakers' confidence in robust GDP performance and the effectiveness of recent monetary measures.
Bitcoin demand has heightened since Trump’s victory, reaching $91,100 driven by the expectations of loosen regulations.
US Market Insights
The post-election rally following Donald Trump’s victory has fizzled, with Wall Street equities slipping for most of Thursday and closing near session lows. The market decline was exacerbated by a slump in vaccine manufacturers, as President-elect Trump announced his intention to appoint Robert F. Kennedy Jr., a known anti-vaccine activist, to lead the Department of Health and Human Services.
This week, BlackRock and JPMorgan cautioned that the ongoing selloff in U.S. bonds could extend further. With Trump’s fiscal plans potentially stoking inflation and widening the budget deficit, traders have scaled back expectations for deep Federal Reserve rate cuts. This has reverberated through bond markets, where traders are reassessing their bets on how aggressively the Fed may ease monetary policy moving forward.
Adding to market tension, speculation that Robert Lighthizer, a known trade hawk from Trump’s first term, may oversee U.S. trade policy again has rattled global markets. Lighthizer’s potential return suggests a possible revival of protectionist measures, including tariffs and trade barriers, which could strain international trade relations, create supply chain disruptions, and increase geopolitical risks. The news immediately pushed the dollar higher, reflecting investor anticipation of economic volatility and safe-haven demand.
Trump’s long-term vision to transition the U.S. economy from a consumption-driven to a production-focused model would prioritize domestic manufacturing and job creation while reducing dependence on foreign goods. This shift, while aiming to bolster U.S. production capabilities, could elevate global demand for the dollar, as it positions the United States as a more significant exporter in international trade. However, it also carries implications for global trade dynamics, with potential winners and losers depending on how trade policies and tariffs evolve under a second Trump administration.
Recommendation:
Investors may find it prudent to take a long position in the U.S. dollar now, given current market dynamics and the potential for a prolonged strengthening of the currency. Additionally, heightened global uncertainty and geopolitical risks could further enhance the greenback's status as a preferred safe-haven asset along with gold.
UK Market Insights
The UK's economic growth slowed to a marginal 0.1% in the most recent quarter, reflecting a combination of pre-budget jitters and persistently high interest rates, dealing a blow to Chancellor Rachel Reeves and the Labour government's first quarter in power. The slowdown was evident across key sectors, with both services and manufacturing facing challenges in the lead-up to the budget announcement. Despite consumer-facing services growing by 0.5%, the overall services sector eked out only a 0.1% increase in output. Recent economic surveys indicate a weakening labour market and diminished consumer and business confidence, exacerbated by budget-related tax hikes that businesses warn could lead to higher prices and fewer jobs.
Compounding the economic strain, the UK's trade deficit widened to £3.46 billion in September 2024, compared to a revised £2.02 billion in August, as both imports and exports fell to multi-month lows. This underscores the challenges facing the UK economy, particularly as the country grapples with declining trade volumes amid global economic uncertainties.
Adding to these challenges, Chancellor Reeves announced a reduction in the Bank of England's cash buffer, a financial reserve designed to absorb potential losses from its quantitative easing (QE) program. Losses from the BoE’s asset purchases have mounted since 2022 due to rising interest rates and falling bond values, particularly as the central bank unwinds its Asset Purchase Facility. By reducing the cash buffer, the BoE may face greater financial risks and heightened volatility in the gilt market, especially if bond yields fluctuate or interest rates shift unexpectedly.
Although the BoE has implemented two rate cuts this year, most recently reducing the base rate to 4.75%, borrowing costs remain elevated compared to pre-pandemic levels. Market sentiment suggests a low likelihood—just a 17.5% chance—of another rate cut in December, with most expecting rates to be held steady as the BoE balances economic fragility with inflationary pressures.
This combination of high borrowing costs, fiscal tightening, and reduced financial buffers introduces new layers of uncertainty and risk for both fixed-income and equity markets. The gilt market, in particular, may experience increased volatility as the BoE's capacity to absorb market shocks is reduced, while investors continue to assess the broader implications of fiscal and monetary policies on economic stability and growth.
Recommendation:
If market participants perceive that the Bank of England may be under greater financial strain given some headwinds might coming from the Trump presidency, inflation, FX market, investors might demand higher yields to compensate for perceived risk. This would lead to rising yields and a corresponding drop in bond prices initially, thus, investors may consider taking a long position in gilts now with an intention to sell when BoE reduce its IRs.
On the other hand, investors might consider taking a short position in the UK equity market, particularly through Q1 2025, as downward pressure on stocks is expected due to persistent inflation risks and potential fiscal tightening impacts from budget measures. The festive season's tendency for increased spending could exacerbate inflation, reducing the likelihood of further rate cuts and potentially dampening consumer and business sentiment.
EU Market Insights
The Eurozone's Q3 2024 GDP growth of 0.4%, the strongest in two years, signals a moderate economic rebound, with Germany managing a 0.2% expansion, narrowly avoiding recession. Meanwhile, the European Central Bank (ECB) remains cautious, eyeing potential rate cuts while closely monitoring domestic inflation driven by wage growth and sluggish productivity, despite improved overall inflation projections primarily due to falling energy prices. Germany's political landscape has added a layer of complexity, with Chancellor Olaf Scholz's firing of the finance minister sparking concerns about potential fiscal shifts, particularly toward defense and security spending, which could elevate volatility and raise Bund yields amid market perceptions of increased risk. Investors will likely be watchful of how these factors interplay, affecting both economic growth projections and the fiscal stability of Europe's largest economy.
Recommendation:
This week presented mixed signals for the European market. While positive GDP growth and signals from the ECB suggesting potential rate cuts offered reasons for optimism, tensions remain around an impending announcement of tariffs by Trump and Germany’s heightened political uncertainty.
Given Germany's central role as Europe's economic engine, any extended political instability or economic uncertainty there could reverberate across the Eurozone. Investors might consider a strategic long position in German bonds now, holding until February 2025 when Germany’s elections are due, to navigate potential volatility.
Additionally, should the ECB proceed with further rate cuts in December, the EU equity market could respond favourably, presenting a compelling opportunity for investors to take a long position now, with plans to capitalize by selling around late Dec 2024/early Jan 2025.
Source: CNBC, Bloomberg, FTnews and Reuters.
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