The week ahead: Risk is back on as we wait for Fed Minutes and Black Friday

The start of this week could be dominated by news about President elect Trump’s choice of Scott Bessant as his pick for Treasury Secretary. This is a clear nod to Wall Street, Bessent is a hedge fund manager, thus it could be a catalyst for a year end rally, which is typically a strong period for risk sentiment and stock markets.

Bessant expected to boost US bond market

Bessant is seen as an antidote to Trump’s most extreme economic views. He is considered a fiscal hawk, and he is in favour of less government spending. Trump’s election pledges were expected to boost the US deficit more than Kamala Harris’s, and a key plank of the Trump trade was to sell bonds. In the last three months, the 2-year Treasury yield is higher by 45bps, and the 10-year yield is higher by 60bps. US bonds have underperformed European bonds in the past three months, as the market has anticipated a surge in the deficit under a Trump presidency. Thus, we may see a reversal in the bond market sell off at the start of this week and US Treasury yields could benefit from the ‘Scott Bessant’ effect. 10-year yields are currently trading around 4.32%, and there is a risk that the US yield curve could disinvert on the back of a move in the Treasury market.

Fresh record highs on the cards for US stocks

The CFTC reported there was an extension in short Treasury positions, and a record short position in 5-year yields. Due to this, there could be a rapid reversal across the US Treasury curve on the back of the Bessant news. The CFTC data also showed a skew towards dollar buying, however, net flows into equities were muted, suggesting that the market could be happy to take a pause as we lead up to the Thanksgiving holiday. US stocks had a decent performance last week, the S&P 500 rose 1.6%, while the Dow Jones made a fresh record high on Friday. US futures have opened the week higher, and the Bessant effect could push the S&P 500 to a fresh record high.

Bessant is also expected to advocate a slow and steady approach to tariffs, which could boost global risk sentiment, and we may see Chinese shares rise on the back of this news, although they were slightly lower on Monday. The dollar has opened broadly lower in early trading at the start of this week. USD/JPY is back below 154.50, and GBP/USD is attempting to test $1.26 after dropping 1.17% last week. The euro was the weakest performer in the G10 FX space last week and has been a big beneficiary of the dollar weakness on the back of Trump’s Treasury pick. EUR/USD has surged above $1.0470 in early trading on Monday and may attempt to regain the $1.05 handle in the short term.

The Dollar: Down but not out

While the market is expected to adjust expectations for Trump’s economic policy on the back of Bessent as his Treasury Secretary pick, we still think that the dollar could trade with an upward bias into year end, and any weakness could be used as a buying opportunity. Although the dollar many lose some of its status as a safe haven since Bessant is seen as a safe pair of hands who could restrain Trump’s most extreme economic urges, the US economy is still outshining others in the G10, which could limit its decline.

Ratings watch could hurt UK and French sentiment

There are some key event risks for the euro and the pound at the end of this week. The S&P rating agency will give its update on France in the wake of the political turmoil since June’s election, and the fact that a Budget has not yet been agreed. France is expected to register a budget deficit of 6% of GDP in 2024, this could surge to 7% next year if economic reforms are not enacted. However, the medicine needed to remedy this deficit could hurt growth. Thus, it may not be a pretty read from the S&P this week, and if France gets a negative outlook, then it could hurt French bonds. Moody’s will also give its rating update for the UK on Friday. This will factor in the changes announced in the Budget, which have faced a lot of criticism, the rise in public borrowing and the weakening in growth. Over the weekend, the Prime Minister announced a plan to cut the UK’s burgeoning benefits bill, which may be an attempt to show their public spending reforms before this update.

Bitcoin choppy ahead of $100,000

Bitcoin is also higher by more than $1000 at the start of the week, after Friday’s sell off. We continue to think that Bitcoin will breach the $100,000 level in the coming days and weeks, although it could be choppy in the lead up to this key level. There are many put options around $98,000 - $99,000, which could trip up investors looking for a quick run to $100,000.

A record Black Friday expected

This week will be shortened in the US for Thanksgiving, which also means Black Friday is in focus at the end of this week. While Black Friday is no longer a one-day event, and instead spreads across weeks, investors will still be watching out for sales reports from the key retailers to see how sales have been impacted by a strong US economy and certainty about who the new President will be. Last week the focus was on Nvidia’s earnings, however, this week we think that the market will be focusing on Amazon, Wall Mart and Target, to see if it will be another record-breaking Black Friday, or if the US consumer is starting to show restraint now that that there are some clouds on the horizon, including a potential rise in the unemployment rate and weakness in the housing market. Estimates are for a record 184.4 million people to shop in store and online over the Thanksgiving weekend. If this number is surpassed, then it could boost risk sentiment at the end of this week.

FOMC Minutes to provide clarity about December decision

There is a deluge of economic data to watch this week, even if US markets will be quieter than normal due to the US Thanksgiving holiday.  The FOMC meeting minutes will be released on Tuesday evening, from the Fed meeting on November 7th. They could provide investors more clarity on what the Federal Reserve will do next. The Fed Fund Futures market is currently pricing in a 55% chance of a rate cut next month. Could these minutes boost expectations of a rate cut? If yes, then we could see the dollar extend its sell off as we progress through the week.

Economic data to be important driver of markets through to year end

Elsewhere in the US, the PCE reading for October will also be released ahead of the Thanksgiving holiday. The market is expecting the headline rate to increased to 2.3% from 2.1%, with the core index expected to rise a notch to 2.8% from 2.7%. If the core PCE rises at a faster rate, then we could see a bout of dollar strength, as the market may recalibrate US rate cut expectations for next month. Due to the sensitivity of economic data and the lack of certainty about what the Fed will do next, we may see excess volatility around key economic data releases in the coming weeks.

European CPI to make life difficult for ECB

In the Eurozone, the focus will be on the November CPI estimate that will be released on Friday. The market is expecting the annual rate to rise to 2.3% from 2%, which is inline with global norms as energy prices have risen strongly of late. The core rate is expected to rise a notch to 2.8% from 2.7%. Due to the rapid deterioration in Eurozone economic data in recent weeks, we do not think that an uptick in Eurozone inflation will move the dial on European rate cut expectations. We expect that the ECB will cut rates when they meet on 12th December. There is currently 46bps of cuts priced in by the market for next month, this could be too rich if inflation surprises on the upside, and we may see the market scale back rate cut expectations to a 25bp cut. If this happens then it could help the euro to recover this week. There is an Irish election and a raft of ECB speakers this week, who may also give the market a nudge about what to expect at next month’s interest rate decision.

UK November data expected to be show deterioration in sentiment after budget

In the UK, the market will get a timely update on retail sales. The CBI reported sales data for November will be released on Tuesday. The market is expecting a decline in reported sales, which suggests that retailers remain pessimistic in the important run up to Christmas. The Lloyds Business Barometer is released on Friday. It is expected to decline further in November, as the business world gives a thumbs down to the UK’s budget. Weak consumer confidence is proving to be a thorn in the UK economy’s side. If the government wants to boost growth, then it may need to work on boosting business confidence. 

RBNZ to provide fresh boost to the economy

Elsewhere, the RBNZ is expected to cut rates by 50bps on Wednesday. The New Zealand dollar fell by more than 1% vs. the USD last week. However, the RBNZ can’t cut by 50bps indefinitely, so this meeting could deliver a hawkish surprise, which may give the NZD a chance to recover. The yen could also be in focus this week, as there is a raft of Japanese data including Tokyo CPI for November. This may determine whether the BOJ hikes rates when they meet next month. BOJ Governor Ueda also hinted that rates may rise in a speech earlier this month. Right now, there is a 56% chance of a rate hike priced in by the market for next month, and this has helped the yen to be relatively resilient vs. the USD, last week it only fell by 0.08%.