Navigating the unpredictable 'what if' trading landscape moulded by Trump's presidency

Amidst a daily barrage of sell-offs rattling the global bond markets, the S&P 500 managed to scrape together a narrow gain. Investors continue to navigate the unpredictable 'what if' trading landscape moulded by Trump's presidency—where the initial enthusiasm for tax cuts is now overshadowed by mounting concerns over proposed tariffs and bizarre geopolitical aspirations, like purchasing Greenland or exerting more control over the Panama Canal. Surprisingly, the session lacked the expected volatility, possibly as traders conserve their energy for the inauguration day, which promises a turbulent few months thereafter.

Despite these uncertainties, a strong showing at the recent Thirty-Year Bond Auction provided a modicum relief, temporarily easing rate jitters and offering a support layer for bond and risk assets. Yet, the looming confirmation of Trump's "One Big Beautiful Bill," potentially marrying tax cuts with aggressive tariff measures, could send long-term yields soaring. With inflation worries and a heightened demand for term premium already pushing yields higher, predictions of a 5% yield on ten-year Treasuries are becoming increasingly plausible. This week, as we edge closer to these levels, those positioned for such an outcome could be well rewarded.

The murkiness of Trump's potential tariff strategy—whether he might extend relief country-by-country and the conditions under which such concessions could be made—continues to cloud the trading landscape. One emerging narrative is that countries could dodge tariffs by purchasing more expensive U.S. goods, adding another layer to the already complex 'what if' scenario facing traders.

Grappling with probabilities—incredibly notoriously elusive extreme tail risks—is a constant challenge as a trader. While we often rely on incomplete information, tools like regression, correlation analysis, and historical data can help bridge some gaps. However, on the latter, I'm skeptical about "curve fitting" as a reliable method since market dynamics evolve, and past patterns don't necessarily guarantee future outcomes, espeically with Trump “ In the House.”

The unpredictability introduced by Trump’s capricious stance on trade and everything else under his gaze, often influenced by his mood or weekend declarations, adds another dimension of difficulty. One must be a mind reader to anticipate the market's next move, particularly given Trump’s tendency to stir up a "Manic Monday" with his weekend tariff tirades. Navigating this environment demands skill and analytical prowess, a lot of luck, and a readiness to adapt quickly to whatever curveball is thrown next.

Amid a volatile start to the year, mainly due to the sell-off in long-duration assets that has finally caught the attention of equity investors, traders are treading cautiously. With a U.S. holiday bridging the gap to Friday’s highly anticipated Non-Farm Payrolls (NFP), there's a notable hesitation to engage in substantial bets. This week's release of the Fed minutes and comments from Fed official Chris Waller did little to clarify the situation, offering scant details for investors to latch onto.

Moreover, the Federal Reserve doesn’t seem poised to shed much light on the path forward. The Fed's preliminary assessments suggest a "high degree of uncertainty" regarding future policy impacts on the economy and inflation.

However, with the U.S. services sector continuing to drive economic growth and cost pressures expected to linger, indications are that the Fed might adopt a more gradual approach to any prospective rate cuts. This backdrop shapes a trading environment marked by caution as market participants navigate a landscape riddled with uncertainties and minimal definitive guidance.

If this week's market instability is a sign that investors fear the inflation dragon hasn't been fully tamed and that central banks are struggling to assert control over the longer end of the bond curve, policymakers and stock market investors have reason to be concerned. This perception that inflation remains unchecked and beyond the influence of traditional monetary strategies indicates potential turbulence ahead for global financial markets.

China's December inflation data will be released this Thursday, and the forecasts indicate subtle shifts. Economists polled by Reuters anticipate that the annual Producer Price Index (PPI) will rise slightly to -2.4 % from November's -2.5 %, suggesting a continued deflationary trend in factory prices. Concurrently, the Consumer Price Index (CPI) is expected to decelerate to a mere 0.1% from 0.2%, highlighting subdued consumer price movements.

This backdrop of weakening inflation is contributing to a historic plunge in Chinese bond yields. The 30-year yield is now undercutting its Japanese counterpart, and the 10-year yield is nearing a similar crossover.

Moreover, the yuan faces intensified downward pressure, recently hitting a 16-month nadir.

China is grappling with a severe deflationary spiral, intensifying concerns about its economic stability. With inflation figures plummeting and bond yields reaching record lows, there's a palpable sense of alarm. This situation is compounded by the geopolitical shadow cast by impending U.S. tariffs, a direct repercussion of President-elect Donald Trump’s aggressive trade policies, which continue to loom large as his inauguration approaches—an event to which Xi Jinping has been notably invited.

However, there's a deeper narrative at play beyond the immediate economic indicators and geopolitical tensions. Under Xi Jinping's leadership, the prevailing dynamics underscore a broader return to stringent authoritarianism. This shift marks a significant reversal from the gradual movement towards a more moderated form of governance. In essence, while various complex factors contribute to China's current economic predicament, at its core, the issue stems from the central government's tightened grip around virtually all facets of free enterprise—a hallmark of a communist regime that has historically struggled in eras gone by where similar models have collapsed under their weight.