Divergence

Last week ended on a very positive note for the US equity markets. All major indices rallied, the S&P500 notched its best week in more than a year and toped the 6000 level for the first time in history. The Dow Jones traded past the 44’000 level for the first time as well, while Nasdaq 100 closed above 21’100, and small caps approached at ATH, despite some investors pessimism that the Trump-fuelled US yields could backfire on small caps as they have smaller margin to shoulder higher-than-otherwise borrowing costs. And indeed, the Minneapolis Federal Reserve (Fed) President Neel Kashkari said that the bank could lower the rates less than previously anticipated, but he rather pointed at the strength of the US economy rather than Trump policies. He said that it’s too early to determine the impact of what’s to come in terms of Trump policies. If the new President favours tax cuts over tariffs, the US equities could continue to surf on a wave of optimism, while focusing on tariffs before tax cuts would brush off a part of the present optimism.

For now, optimism prevails. During the weekend, the Trump optimism continued to show in Bitcoin prices. The price of a coin spiked past the $81’000 level, and the next natural target on the grill is the $100’000 psychological level.

That’s the American leg of the story: the picture remains bullish for the US equities. Elsewhere, worries mount: FTSE 100 and the European Stoxx 600 index both closed last week below the 200-DMA on worries about a heated international trade environment and the Chinese leg of the story is much less dreamy, too. China announced that it will deploy 10 trillion yuan to refinance local government debt, as expected by investors. Alas, the announcement failed to revive optimism as many were hoping to see bigger measures deployed in response to Trump presidency – who is now expected to increase tariffs on Chinese goods to 60%. As such, the big banks are back to cutting their growth forecasts for China. Standard Chartered and Macquarie expect the increased US tariffs to shave 2 percentage points off annual growth. While UBS trimmed its growth forecast from 4.5% to 4%.

The data released during the weekend wasn’t encouraging, either. Consumer inflation in China came in line with expectations, but deflation in producer prices unexpectedly accelerated last month to -2.9% on a yearly basis, and came as a mixed signal on the impact of the stimulus measures on the Chinese economy. As such, the CSI 300 bounced lower on Friday and erased a part of last week’s gains that were built on optimism that the Chinese stimulus measures would – this time – please.

And crude oil is under a renewed pressure since Friday, on China’s failure to wet investors’ appetite with fiscal stimulus measures. The barrel of US crude is back testing the $70pb support to the downside, having erased past week gains that were supported by geopolitical worries and hints that OPEC would delay the end of its production restrictions by at least a month. Iron ore is also under pressure, the spot price slipped below the 100-DMA and the latter weighs on the Aussie.

Elsewhere, in the FX, the US dollar index remains bid on rising uncertainties regarding the Fed’s easing path. For now, the markets still expect the Fed to deliver another 25bp cut before the year ends, but that probability fell from above 70% to below 65%. The data – especially the inflation data – will gain importance moving forward as Trump policies – the tax cuts and tariffs – are inflationary and will certainly limit the Fed’s capacity to ease wholeheartedly. This week, investors will focus on the next US CPI update, due Wednesday. The headline inflation is seen steady at 2.4% and core inflation unchanged at 3.3%. Higher-than-expected figures could further awaken the Fed hawks and support the dollar bulls against major peers.

Speaking of major peers, the EURUSD is testing the 1.07 support to the downside. The Trump’s tariff threat on European imports has become one of the major drivers here as well, combined with the troubled French finances and the chatter of early election in Germany. A further retreat is on the cards, unless we see a surprise easing in US inflation. Across the Channel, Cable consolidates below the 1.30 level. The Bank of England’s (BoE) less dovish stance after the UK budget is countered by a broad-based dollar strength, yet sentiment in EURGBP reflects well the divergence between more dovish ECB expectations and less dovish BoE expectations. And the latter points at a possible and a sustainable advance in EURGBP to 0.80/0.82 area.