Traders take stock, as the Trump trade dominates in FX

A few key themes are developing this week. The first is a slowdown in stock markets. The main US stock market recorded its first back-to-back loss in weeks on Tuesday, while the Nasdaq eked out a small gain. This week’s stock market price action suggests that the 50th record high for the S&P 500 could be a tough ask with the US election so close. European indices are mostly flat to lower, as they have also lost their anchor as we lead up to some key geopolitical risks. There are some big US earnings releases later today, including Boeing and Tesla, who will report earnings once the US market closes. These will be watched closely to see if any positive earnings surprises can boost the US blue chip stock market back to its winning ways.

Our week ahead, sent on Monday, gives a thorough review of what to expect from Tesla tonight, and we will be watching to see if Elon Musk can sell a more convincing story about Tesla’s future plans for growth compared to previous earnings reports.

Bond market divergence heats up

The other themes that are dominating financial markets right now include a divergence in global bond markets, and the Trump trade. Looking at bond yields first, US Treasury yields are rising this week, as the market prices out the prospect of two further rate cuts this year. The market now expects 42 basis points of cuts by the end of this year, a month ago there were 79 basis points of cuts priced in for the November and December Fed meetings. This is a huge shift and it is driving dollar strength. UK yields are also rising in the lead up to next week’s budget. However, European yields are falling, as the market prices in 45 basis points of cuts at the ECB’s December meeting.

Eurozone rate cut expectations surge

There has been a huge recalibration of rate cut expectations for the Eurozone in the past month. On September 23rd, the market had expected Eurozone yields to be 2.97%, today it is 2.8%. This shift in rate cut expectations is causing spreads between US and UK yields with German yields to widen. The spread between US and German 10-year yields is now 191 basis points and is higher by another 2.5 bps today. The spread between UK 10-year yields and German yields is also a hefty 187 basis points. This does not mean that the market thinks German debt is safer than US or UK debt, rather it is a sign of economic divergence, with Europe struggling as the UK’s growth picks up and as the US surges ahead.

The Trump trade to dominate before election

Although the pound has decent yield support, it is not protecting the pound, and GBP/USD remains below $1.30. Losses for EUR/USD have been sharp, and this pair is back below $1.08.  A strengthening US dollar is part of the Trump trade, with traders buying the US dollar as the US presidential election polls narrow. Thus, with 2 weeks to go before the US election, it is hard to see the dollar fall in a meaningful way ahead of this event.

The gold price has made another record high on Wednesday, which is linked to the Trump trade, as well as Middle East tensions. Brent crude oil remains above $75 per barrel, although oil is giving back some gains today, while the price of gold continues on its parabolic rise.