Trump trade, China trade, reflation trade, AI trade

There are a few stories developing at the same time:

The Trump trade consists of going long Bitcoin and equities (especially gunmakers, oil producers) and short the long term treasuries on expectation of exploding US debt with tax cuts, higher spending and growth supportive Trump policies. The yield on 30-year Treasuries yesterday surpassed the rate on two-year notes for the first time since January – the 30-year notes reflecting the exploding spending, while 2-year notes benefit from the rising Federal Reserve (Fed) rate cut bets as Powell reiterated on Monday that recent data boosted confidence that inflation is heading toward the Fed’s 2% goal. Other than that, Trump’s Media company jumped more than 30% yesterday following the murder attempt..

Nothing to do with Trump, but Apple’s 1.67% surge to a fresh high following news that its annual sales in India hit a record of $8bn – on path to potentially offsetting the Chinese weakness – and after being named a top pick at Morgan Stanley, also helped major US indices do well yesterday. While Goldman Sachs jumped more than 2.5% after announcing results. GS announced a much meagre investment banking revenue growth compared to JPM and Citi, but the trading unit and capital markets business did better than expected. And Trump trade is also positive for bank business. As a result, US kicked off the week on a positive note after the murder attempt on Trump, all major US indices – the S&P500, Nasdaq 100 and the Dow Jones eked out gains as the Russell 2000 jumped 1.80%.

Here in Europe, the Trump trade is not necessarily positive for the European stocks as who says Trump says higher tariffs and increased trade tensions. That’s one thing. Then there is the China trade where China’s inability to print sufficiently strong growth weighs on energy and commodities that are heavily represented in FTSE 100 and on the European luxury stocks. As such, Shell and Total Energies for example fell on the announcement of a weak growth number from China yesterday while their US peers gained on expectation that Trump will go slow on the climate-friendly policies and give support to the traditional energy businesses. In the luxury space, Burberry tanked 16% - yes 16% - yesterday after issuing a profit warnings and replacing its CEO. The Swiss Swatch Group lost almost 10% after slower spending in China in the first half led to a 70% decline in operating profit!

Happily for European stocks, the reflation trade is providing a boost, as rate cuts from major central banks are fostering better sentiment for European equities and supporting commodities weakened by China's economic slowdown. But alone, hope of lower rates may not suffice to keep the European Stoxx 600 near record, as Europe’s 12-month forward earnings revisions ratio, which is a gauge of analyst upgrades versus downgrades moved further into negative territory before companies started reporting their Q2 earnings. You could argue that softer earnings are easier to beat, of course, but do they really justify a rally to ATH levels, is another question.

Then there is the AI trade - which has been pushing the major US indices to record after record, but where, the high valuations start giving a foolish smell suggesting that a correction is certainly near. The expectations – here - are robust: the big tech earnings should slow but remain strong whereas the non-tech are expected to print positive earnings after quarters of struggle. That, combined with the rising odds of a September rate cut and heightened odds of a Trump victory keeps buyers in charge. But if the Big Tech starts falling, the other sectors will hardly make up for the drop because they have neither the potential nor a justification to do so.

All in all, uncertainties loom as equity markets on both sides of the Atlantic Ocean continue to flirt with record high levels. Due today, investors will focus on Canadian inflation print and the US retail sales. Retail sales in the US are expected to have fallen 0.2% in June. Such weakness would back the Fed’s easing inflation story and further reinforce the expectation of a September Fed cut. We could then see the US dollar index make a decisive move below a major Fibonacci support – the major 38.2% retracement that stands near 104.20 – and step into the medium-term bearish consolidation zone for the first time since the beginning of the year. If that happens, the price action would perfectly reflect the Fed rhetoric and give a further confidence regarding the weakening dollar outlook. The latter would inevitably boost the currency valuations elsewhere, and ease the dollar-led inflationary pressures elsewhere, as well. The EURUSD tested the 1.09 offers yesterday while Cable is flirting with the 1.30 psychological resistance amid a broad-based USD weakness, and ahead of the latest CPI update due tomorrow. UK’s headline inflation is expected to have eased below the 1.9% in some analyst surveys, but services inflation and jobs data will also play an important role in shaping the Bank of England (BoE) expectations for the August meeting. A sufficiently weak set of data will make the sterling bulls’ job harder near the 1.30 mark, while any strength in this week’s data could get the BoE doves to further scale back their rate cut expectations and pave the way for a further rally in Cable to above the 1.30 mark for the first time in a year.