As financial conditions tighten, global stock outflows typically heighten

Markets

The post-election euphoria that lifted equity markets came crashing down last week as the weight of reality set in. A trifecta of Jay Powell’s cautious remarks, persistently sticky inflation data, and the stark realization of the costs and trade-offs baked into the incoming administration’s policy agenda dampened investor sentiment. While equities stumbled under this growing uncertainty, U.S. Treasury yields and the dollar surged ahead, driven by recalibrated growth and inflation expectations and a market navigating an increasingly complex and shifting economic landscape.

Indeed, the inflation dragon is roaring back, and Wall Street is breaking a sweat. With tax cuts, tariffs, and fiscal expansion fueling the fire, price pressures are heating up—hotter than a bottle rocket’s backside on New Year’s Eve. The sentiment is flipping fast, and the street braces for higher-yielding impact.

The post-election "Trump Bump" hit its first stumbling block last week, with the S&P 500 slipping 2% after last week’s impressive 4.7% surge. Yet, while stocks paused for breath, the U.S. dollar stayed resilient, defying typical seasonal headwinds and showing remarkable staying power.

This dollar strength isn't random—it's fueled by a potent mix of forces reshaping market sentiment. Federal Reserve Chair Jerome Powell’s cautious tone signalled that the Fed is in no rush to ease rates further, reinforcing the perception that the economy’s resilience will keep monetary policy tighter for longer. Meanwhile, Trump’s tariff threats are increasingly seen as more than mere bluster, stoking fears of trade disruptions that could ripple across global markets. Add to that the expectation that the U.S. will maintain its pole position in economic growth over other developed nations into 2025, and you have a greenback that refuses to back down.

With these dynamics in play, the dollar’s upward momentum underscores the market’s recalibration to a world where fiscal policy, trade tensions, and growth divergence take center stage. Investors are left navigating a landscape where old assumptions are being upended and rewritten as the strong dollar emerges as a defining feature of the post-election financial narrative.

European markets

European markets are reeling in the aftermath of Donald Trump’s election victory, falling behind Wall Street in an ever-widening gap. Trump’s aggressive trade rhetoric and sweeping tariff threats—sparing neither friend nor foe—have sent shockwaves across the Atlantic, fueling fears of a protracted economic struggle for the region. Nowhere is this angst more evident than in the euro, which has plunged to a 12-month low of around $1.05, its sharpest sell-off since the 2022 energy crisis.

Investors are increasingly betting on a growth slowdown in Europe, exacerbated by the prospect of Trump's policies amplifying trade friction. The spectre of these tariffs and Europe’s fragile economic position have investors bracing for the European Central Bank to step in with more aggressive interest rate cuts. Meanwhile, the U.S. dollar continues strengthening on the back of robust U.S. growth projections, widening the transatlantic divide.

The divergence between the two economic powerhouses has left European markets searching for footing. The eurozone’s vulnerability to external shocks is again in the spotlight, with a looming tariff war threatening to weigh further on exports and sentiment.

Asia markets

Asian markets are also reeling under a quadruple threat— looming tariffs, rising U.S. bond yields, a surging dollar, and Wall Street’s stumbles—shaking the foundations of emerging-market stability. The global angst is palpable, with the MSCI World Equity Index posting its longest losing streak since September. Meanwhile, the MSCI Asia ex-Japan Index has tumbled 4.35% this week, marking its worst performance since June 2022—a stark reflection of investor anxiety across the region.

At the center of this chaos lies the relentless rally in the U.S. dollar, tearing through Asian economies like a financial wrecking ball. The dollar index soared 1.6% last week to hit its highest level over a year, notching its seventh consecutive weekly gain. While technical indicators suggest the dollar is overbought, the market’s momentum is undeniable. Few are willing to stand in the path of this runaway train, and any dips in the greenback are likely to be shallow and quickly snapped up.

The implications are stark for ASEAN+3 nations. The region’s reliance on the U.S. dollar exposes two critical fault lines. First, the spectre of U.S. dollar funding stress looms large. As market volatility spikes and depreciation pressures mount, borrowing costs are climbing, access to funding is tightening, and foreign exchange hedging capabilities are dwindling. Non-financial companies face the brunt of this squeeze, with reduced credit line access and a growing liquidity crunch.

Second, the U.S. dollar amplifies global shocks, acting as a conduit for volatility stemming from trade war angst to a hint of a December rate cut pause in U.S. monetary policy. As a global safe-haven asset, the dollar’s surge triggers a cascade of portfolio rebalancing and exchange rate pressures, transmitting economic stress to ASEAN+3 markets and heightening the risk of destabilization.

The situation is dire. The roaring dollar intensifies financial strain, drives up borrowing costs, and leaves Asia’s emerging markets on a knife’s edge. With the U.S. economy gaining strength and Asia caught in a storm of looming China trade tariffs amid depreciation pressures and liquidity risks, investors are grappling with an increasingly volatile and precarious landscape.

Question period

Despite all the heebie-jeebies—the tariff bogeyman looming large in President-Elect Trump’s agenda—why aren’t global markets down 10%, and why hasn’t the DXY punched through 108+? Paradoxically, the uncertainty surrounding Trump’s trade strategy has become the market’s unexpected sedative. Without a clear playbook to assess whether his tariffs will land as a light jab or a full-force haymaker, investors remain frozen in limbo, hesitant to make decisive moves.

This calm before the storm isn’t just about ambiguity—it’s about the lack of a coherent response playbook. How will trading partners retaliate? Will companies scramble to adjust supply chains, or will leaders hammer out a last-minute compromise? These are wild cards no one can fully price in yet. Speculation only stretches so far when the rulebook is still being written.

Markets are notoriously slow to react to threats they can’t quantify. But make no mistake: when views turn linear and the tariffs drop, this eerie calm will shatter. The recalibration frenzy that follows won’t just ripple—it’ll roar. For now, the storm is lurking out there, waiting for the precise moment to strike.

Oil markets

Crude oil prices slammed into reverse on Friday, snapping a three-day rally as easing geopolitical tensions and dismal demand data from China hit the brakes on bullish momentum. The market is now flirting with peaceful resolutions in the Middle East and Eastern Europe, dialling back the risk premium that had lit a fire under prices.

The real gut punch, however, came from China, the world’s second-largest oil consumer. Fresh data revealed a jaw-dropping 5.4% plunge in apparent oil consumption for October, dragging the year-to-date average down by 4.03% to 14 million barrels per day. This isn't just a blip—it's a red flag. Even with China’s fragile economy propped up by stimulus, the rapid shift to electric vehicles is taking a severe bite out of oil demand, leaving the market scrambling for footing.

Earlier in the week, the oil bulls had a brief moment in the sun, riding the wave of an unexpected surge in U.S. gasoline demand that defied seasonal norms. The U.S. looked like the lone torchbearer for oil bulls, but even that spark is dimming. As global demand concerns grow louder, the thinning ranks of optimists are starting to resemble an endangered species.

Gold markets

Despite its long-term bullish narrative, gold’s recent stumble highlights the intricate dance of global economic forces and evolving market sentiment. Earlier this year, the precious metal surged on optimism that the Federal Reserve would embark on multiple rate cuts through 2025. Lower interest rates typically enhance gold’s allure by reducing the opportunity cost of holding a non-yielding asset. But as the narrative shifted, so did the market’s expectations.

The Federal Reserve’s hawkish tone and stubborn inflation have reshaped investor sentiment. Elevated real yields have further dampened gold’s appeal, stripping away a key pillar of support. Once a standout alternative to interest-bearing assets, gold now faces headwinds as investors recalibrate their strategies in a landscape of tightening financial conditions.

Gold markets are on shaky ground, with bullion sliding back into its traditional inverse relationship with U.S. real yields and the dollar. Earlier this year, gold managed to defy gravity, rallying despite climbing real yields and a surging dollar. But that anomaly has faded, and gold’s recent struggles suggest geopolitical concerns, long a driver of safe-haven demand, are losing their edge. Adding to the uncertainty, many investors believe Donald Trump’s return to the White House could usher in a more peaceful Middle East and Eastern Europe, further dampening gold’s appeal as a crisis hedge.

Central bank demand, a cornerstone of gold’s bullish narrative, is now easing. After record purchases in 2023 and early 2024—1,037 tonnes and 290 tonnes, respectively—the People’s Bank of China (PBoC), a significant buyer, pulled back in the second half of 2024. This retreat leaves Asian retail investors as the primary physical buyers, but their demand may not be enough to sustain price momentum. Gold faces heightened downside risks without the robust institutional buying that characterized recent years.

The complexity deepens with the possibility that central banks are strategically hoarding dollars rather than buying gold, positioning themselves for potential intervention in turbulent currency markets. This maneuver could be a preemptive response to the looming threat of U.S. tariffs acting as a global economic wrecking ball, disrupting trade flows and putting immense pressure on emerging market currencies.

Long-term bullish drivers for gold—rising fiscal deficits, central bank diversification away from the dollar, and broader de-dollarization efforts—are firmly intact. Yet, the metal finds itself in a challenging tug-of-war. A strengthening dollar, surging yields, and waning institutional demand have clouded its outlook, leaving the path forward uncertain. Gold’s role as a safe haven is being tested in an environment where the gravitational pull of U.S. economic resilience and monetary policy shifts overshadows traditional support mechanisms.