Trump's Tariff Plans Weigh on global markets. Yen's Strength Puts Temporary Pressure on the Dollar
- Claire Linh Nguyen
- Dec 5, 2024
- 6 min read
What do we need to know for the week ended on 29th Nov 24
💡Highlights 💡
Gold prices climbed 1% to over $2,660 per ounce on Friday, which was driven by a weaker US dollar and heightened geopolitical tensions.
The Japanese yen strengthened by approximately 150 per dollar on Friday, following data showing Tokyo's inflation surpassed 2% in November.
US PCE inflation data met expectations at 2.3%, prompting an accelerated decline in the US 10-year Treasury yield.
Trump’s proposed 10% levy on Chinese imports and 25% tariffs on goods from Mexico and Canada exerted downward pressure on the European equity market.
US Market Insights
Last week, Donald Trump selected Scott Bessent, a veteran hedge fund manager, as Treasury Secretary for his second term. The choice was welcomed by investors, who view Bessent as a stabilizing force within Trump’s administration. With his Wall Street pedigree, Bessent is expected to temper Trump’s more aggressive economic policies and focus on measured strategies to boost growth and tackle the budget deficit.
Bessent has previously advocated for targeted trade tariffs and policies like deregulation and energy dominance to achieve fiscal stability. His appointment helped extend a rally in US Treasuries, with 10-year yields falling to 4.3%, while the dollar softened amid expectations of less aggressive trade measures under his leadership. However, Trump's tariff threats remain a wildcard; the president-elect announced plans to impose 10% tariffs on Chinese goods and 25% on imports from Mexico and Canada, stoking concerns of trade disruptions.
On the economic front, the US economy expanded 2.8% annually in Q3, driven by robust personal spending, which saw its fastest growth since Q1 2023. Personal income also rose 0.6% in October, its biggest gain in seven months, signaling resilience in the consumer sector.
Looking ahead, markets are eyeing a potential year-end rally. Analysts like Scott Rubner of Goldman Sachs project the S&P 500 could hit 6,200 points, buoyed by a "Santa Claus rally" that historically delivers an average 1.3% gain in the final trading days of December. The retail sector is already showing strength, with the SPDR S&P Retail ETF (XRT) breaking resistance levels, adding momentum to a seasonally strong period for equities.
While optimism for a bullish end to 2024 builds, the interplay of fiscal policy, trade developments, and consumer activity will shape market sentiment heading into 2025.
Recommendations:
Trump’s economic agenda presents a paradox for the dollar. While he values the geopolitical leverage of a strong dollar, he also aims to keep the exchange rate competitive to support US manufacturing. This tension could lead to fluctuations in the dollar’s trajectory as markets weigh the impact of protectionist trade policies against broader economic stability.
For investors, buying USD could be a viable strategy for short-term gains, especially given the cautious outlook on a rate cut by the Federal Reserve this December. With PCE inflation accelerating, personal incomes rising, and a boost from household spending during Black Friday, inflation may remain elevated through Q4 2024. However, a potential interest rate hike from the Bank of Japan could exert temporary downward pressure on the USD later this month.
For equity investors, taking a long position now in sectors poised to benefit from the festive season—such as retail, hospitality, and food & beverage—could be a strategic move. These industries are likely to see a surge in consumer spending during the holidays. Additionally, the defense sector remains attractive due to heightened demand driven by ongoing geopolitical tensions, making it another strong contender for investment.
UK Market Insights
The UK is navigating a challenging economic landscape shaped by domestic reforms, strained consumer confidence, and rising global trade tensions. Recent developments highlight the headwinds facing the economy and key sectors like autos, healthcare, and energy.
Consumer confidence remains weak in the wake of the Labour government’s first budget in October, according to the British Retail Consortium’s November survey. While personal financial outlooks improved slightly, broader opinions on the economy worsened, leaving consumer spending stagnant. The business community has raised concerns over higher taxes and changes to employment rights, which they say are straining employers.
Despite the cautious mood, October saw net borrowing of mortgage debt increase to £3.44 billion, above market expectations. This suggests some resilience in housing demand, though it contrasts with broader economic pessimism. Higher borrowing could reflect anticipation of rising interest rates or the need to secure fixed terms before potential future hikes.
Uncertainty looms over US-UK trade relations following President-elect Donald Trump’s renewed pledge to impose tariffs of up to 20% on goods from many countries. The US is the leading destination for nine of the UK’s 15 key export sectors, including transport equipment and pharmaceuticals. Rolls-Royce Holdings, Jaguar Land Rover, AstraZeneca, and GSK rely heavily on the US market, with significant portions of their revenue tied to American consumers and operations.
While two-thirds of US-UK trade consists of tariff-exempt services, higher tariffs on goods could ripple through the UK economy, affecting jobs and growth in manufacturing-heavy regions. Bloomberg Economics estimates that Trump’s trade policies could reduce UK GDP growth to below 1% in a worst-case scenario.
The UK expanded sanctions on Russia’s energy industry, targeting oil tankers and insurers to curb the flow of petrodollars funding the Kremlin’s war in Ukraine. These measures, coupled with Western-imposed price caps on Russian crude, aim to squeeze Russian revenues but could exacerbate volatility in global energy markets. As colder weather approaches, Europe’s reliance on gas reserves—already 10 percentage points below last year’s levels—raises fears of a renewed energy crisis.
Recommendation:
The combination of domestic challenges and global trade uncertainty paints a mixed picture for the UK economy. While the direct impact of Trump’s tariffs may be limited due to the dominance of services in US-UK trade, the potential disruption to manufacturing and export-heavy sectors cannot be ignored. Investors may want to monitor developments in the auto, healthcare, and energy sectors closely, as these industries will likely bear the brunt of global and domestic headwinds.
Investors may consider taking a long position now into energy sector as sanctions on Russia and dwindling gas reserves in Europe are likely to drive energy prices higher. Companies in oil, gas, and renewable energy sectors could see increased revenue, especially if geopolitical tensions persist and supply constraints worsen.
EU Market Insights
The Euro Area Economic Sentiment Indicator (ESI) edged up by 0.1 points to 95.8 in November 2024, slightly above market expectations of 95.1. While the uptick signals a positive shift, the recovery remains uneven across sectors and countries. Confidence improved in industry and retail trade, but weakness persisted in services and among consumers, reflecting caution about broader economic prospects. Notably, sentiment improved in France, Spain, and the Netherlands, while Germany recorded a marked decline, highlighting its critical role in shaping future Eurozone growth.
France’s labour market showed cracks in October as the number of unemployed rose by 53.6 thousand to 2.892 million, marking the sharpest increase since April 2020. This rise challenges the narrative of labour market resilience in the face of higher ECB interest rates, aligning with arguments from dovish policymakers for caution in monetary tightening.
Germany’s inflation rate remained steady at 2.4% in November, defying expectations of an increase. Similarly, Spain’s inflation also rose to 2.4%, matching forecasts. These figures suggest stabilizing price pressures, but core inflation across the Eurozone remains elevated at 2.7%. The data has tempered expectations for aggressive ECB rate cuts, with policymakers walking a fine line between fostering growth and maintaining price stability.
This week, Donald Trump’s proposed tariffs—10% on Chinese goods and 25% on imports from Mexico and Canada—have stirred concerns across global markets. European automakers, including Stellantis and Volkswagen, face significant risks, with estimates suggesting potential earnings losses of €6.4 billion ($6.7 billion) due to disrupted supply chains and higher costs. The tariffs threaten to destabilize the Eurozone's already fragile manufacturing sector, which is linked to broader industries like chemicals and steel.
Meanwhile, the EU is responding to geopolitical tensions with expanded sanctions on Russian energy assets. The measures include targeting tankers and insurers involved in Russian oil trade and potential sanctions on Chinese firms accused of aiding Russia’s military capabilities. These sanctions, combined with the conflict in Ukraine, have driven a 45% surge in European gas prices this year, adding to economic pressures.
Recommendation:
The Eurozone’s economic landscape remains uncertain, shaped by global trade policies, energy disruptions, and inflation dynamics. Investors should remain vigilant, focusing on sectors with resilience and growth potential amid evolving challenges.
European investors might find strategic opportunities in the energy, retail, and food & beverage (F&B) sectors, particularly given the dual impacts of geopolitical tensions and the holiday season.
The EU’s measures to curb Moscow’s oil and gas revenue may redirect demand to alternative energy suppliers, creating potential growth opportunities for European energy firms. Also,the holiday season typically drives increased consumer spending on retail goods, food, and beverages. With the festive period underway, companies in these sectors often see a revenue spike.
Source: CNBC, Bloomberg, FTnews and Reuters.
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