Perception points to smooth sailing into year-end

Markets

U.S. stocks surged higher on Thursday, riding the wave of a 25-basis-point rate cut by the Federal Reserve and the bullish momentum sparked by Donald Trump’s return to the White House. After a blockbuster day for the Republicans, investors have swiftly pivoted to the familiar playbook: central bank easing policy that sends stocks soaring amid preemptive rate cuts.

The Fed’s message was clear—disinflation is taking root, and the era of sky-high rates is fading. Powell wisely kept his distance from predicting inflation risks tied to potential Republican policies, sticking to the script. Yet, the "Trump effect" looms, bringing the possibility of a bit more growth paired with renewed inflation pressures. It’s a balance that could temper the Fed’s rate-cut pace eventually. Still, the stage is set for post-January 20,2025, corporate tax cuts and deregulation vibe—the ultimate backdrop for a bullish stock market.

Investors, sensing a shift, are revelling in the rate cut fever and Trump’s pro-business tilt, sending the major indexes to new record highs. The promise of corporate tax relief and a less regulated environment is an economic shot in the arm, and stocks are feeding off the optimism. Animal spirits are well and truly alive, propelling the market upward.

The story isn’t just in the rally itself but in the remarkable volatility collapse paving the way for these gains. Forward indicators signal lower volatility, which almost always points to higher stocks. While theories abound on why this is happening, the simplest answer is that the market views the “regime” shift as favourable. With funds that were sidelined during election uncertainty now scrambling to get back in, it’s creating a powerful positive feedback loop.

In today’s algorithm-driven market, when hedge funds sell enough volatility to flip market makers net short on VIX puts, the Fear Gauge dips well below 18.5, triggering mechanical stock buying. And when it slips below 15, that buying kicks into overdrive. Right now, we’re teetering on the edge of that next phase of earnest buying, and the perception is smooth sailing ahead into year-end, supported by a December rate cut.

Asia markets

Asian markets are wrapping up an epic political week, fueled by a risk-on surge from U.S. markets after Fed Chair Jerome Powell’s dovish remarks. Powell’s reassurance that disinflation is well underway and that rate cuts are likely—albeit on a slower timeline—should provide a fresh jolt of optimism across the region. Typically, lower Treasury yields and a softer dollar create a favourable backdrop for Asia, and today could be no exception. With the 10-year yield slipping 10 basis points in its biggest single-day fall in three months and the dollar down 0.7%, Asia’s markets seem primed to capitalize on this momentum.

As the National People's Congress Standing Committee meeting wraps up today, all eyes are on Beijing for potential surprise stimulus announcements that could supercharge Chinese equities. A hefty dose of fiscal support is exactly what Dr. Risk-On Asia ordered—an ultimate shot in the arm that could boost consumer demand and send stocks soaring. If Beijing delivers, we might see a powerful rally ripple through the region as investors gear up for a fresh surge in market momentum.

The yuan made a solid comeback on Thursday, bouncing back from Wednesday’s steep 1% dip to a three-month low—a dramatic reaction to Trump’s election win. This quick rebound hints that the FX markets are starting to factor in just enough stimulus from Beijing’s playbook to keep the yuan steady and far from the dreaded whispers of devaluation.

The Fed’s dovish tilt sent freshly minted dollar bulls scattering, with volatility crushed and risk appetite roaring back. Some Traders ask, “Who needs the greenback in a global risk-on environment?” But as I said in our FX report yesterday, count me in—I’ll be the first to raise my hand and say, “Yes, please, I want more dollars!” if the dollar dips post-Fed cut. With solid carry and a strong chance that the Fed might cool its pace on future rate cuts, this is far from a full reversal for the dollar.

For now, with Trump’s trade policies still a distant consideration, Asia should have a risk-on runway to stretch its wings and ride this rally for all it's worth.

Oil markets

Oil traders are trying to  unravel the energy puzzle a second Trump term might bring. Trump’s tough stance on Iran, with severe sanctions, historically tightened oil supply, pushing prices up. In the short term, similar moves could trigger a price rally by squeezing supply—but his pro-U.S. production agenda could counteract this by boosting domestic output.

Post-election, oil prices initially dipped, with Brent crude sliding nearly 2% to just over $74 a barrel, only to bounce back on the Iran sanctions tail risk—a clear sign the market is still weighing the impact. It’s a delicate balancing act: Trump’s policies could simultaneously fuel and temper oil prices, and much will depend on how his administration plays the sanctions and domestic production cards. Traders are gearing up for a high-stakes energy market full of unexpected twists.

Time to move on folks

The U.S. election may be behind us, but the real game is just beginning for investors. With Trump’s win, we’re in a bit of a holding pattern, waiting for the full playbook—which likely won’t emerge until the second half of 2025. So, what’s next? Until then, it’s about reading between the lines: Trump’s social media comments, his picks for top roles like the Treasury Secretary, and the subtle cues each decision might send.

It’s not only the big policy moves; each tweet, appointment, and press release is like a small aftershock across the markets.

These choices will start to paint a picture of what’s coming—tax reform, shifts in regulation, or potentially more hardline trade policies. However, I suspect these moves will be tempered, partly because Trump and the Republicans’ hands are tied fiscally.

Still, all eyes will be on a few key appointments: the Secretary of State, the Treasury Secretary, and, down the line, the Fed Chair—though that decision won’t come until May 2026. Expect signals everywhere, as each pick will reveal more about Trump’s vision for this second term and its impact on markets. The smoke signals are bound to be plentiful, and they’ll keep us on our toes.

So, while the market has tossed aside its party-affiliated election game-day shirt for a unified Team USA jersey, legacy media will continue its insane and divisive election postmortem. But honestly, that’s water under the bridge at this point, and all eyes are now on the road ahead. Investors are laser-focused on navigating the next moves for growth, inflation, and rate cuts, with markets already buzzing around the potential policy shifts and fiscal maneuvers that might define the next chapter. The party lines may be fading, but the stakes in the economic playbook have never been higher.