Week ahead: Trump continues to dominate financial markets

This time last week we were talking about how close the US Presidential election would be. How the swing states were neck and neck. How wrong the polls were. At the weekend it was confirmed that all 7 swing states, including Pennsylvania, the tipping point state, and Arizona, which was only called on Sunday, had been won by Trump. The Republicans have control of the Senate, and they are only two seats away from gaining control of the House. The big win for the Republicans has been greeted by jubilation in financial markets. US equity indices were higher by 4.6% last week, the Nasdaq was higher by more than 5% as all three US indices closed at record highs and US equity indices had their best week of the year. The win in Arizona could see an extension of the Trump trade as we start a new week.

Can the Trump trade continue?

The Trump trade was turbo charged at the end of last week, after the FOMC said that the prospect of higher inflation under a Trump administration would not lead to a meaningful upgrade to their inflation forecast or scaling back of their forward guidance for interest rate cuts. This helped bonds to join the party,10-year yields ended up 2bps last week, while 2-year yields rose by 9 basis points. The question now is, can the Trump rally continue, or was last week’s price action the market reacting to the political clarity provided by this election result?

Bitcoin surges on Trump hopes

The early signs on Sunday are good. Trump is a big fan of crypto, and Bitcoin surged to a fresh record high above $80,000 late on Sunday, as the crypto world waits to see if Trump will establish a broader use for crypto in the US, and his plans for a Strategic Crypto Reserve. We think that the price of bitcoin could be biased to the upside in the medium term. Stock futures in the US are higher as we start a new week and the S&P 500 is expected to extend gains above 6,000. However, as details of Trump’s policy priorities are starting to trickle through, there could be more focus on inflationary fears.

Trump trade sees rate cut expectations scaled back

Trump has been talking tough on tariffs in recent days and addressing illegal immigration. Both are inflationary policies: one through rising tax rates, and the other through reducing the labour supply. Trump is also expected to slash taxes and extend the Tax Cuts and Jobs Act, which could cause the US economy to overheat. This has taken some of the enthusiasm out of the Fed Fund Futures market. The probability of a rate cut in December has fallen to 64%, before the election this was 80%. Due to this, the Trump trade could morph in the coming days. The frenzied rally in the aftermath of the win for Trump, could face some headwinds. For example, if bond yields continue to rise, then we could see US mid-caps struggle, although we think blue chip stocks should be well supported, especially mega cap tech and Tesla, which reached a $1.3 trillion valuation last week.

Trump talks tough on tariffs, with some exemptions

Added to this, we may see some differentiation in the performance on global stocks as we get more information about Trump’s tariffs plans. The Democratic governor of New Jersey said over the weekend that the UK could enjoy a better regime under the Trump administration than other parts of the world. Thus, we could see some outperformance of the FTSE 100 vs. other European indices at the start of the new week. Both the Eurostoxx 50 index and the FTSE 100 fell last week, although European futures are pointing to a positive open on Monday. While a favorable tariff regime for the UK is something to celebrate, upside for UK stocks could be limited by news that some of the biggest UK retailers, including Tesco and Sainsbury’s may have to raise prices due to the impact of the national insurance increase for employers in the Budget. Thus, the prospect of rising prices could limit any upside for UK stocks at the start of this week.

Asian stocks in the firing line now Trump is president-elect

Shares in Asia have opened lower at the start of the week. Disappointing stimulus news from China on Friday, disappointing Chinese inflation data for October and Trump’s tariffs are a toxic mix for risk sentiment. Although the detail of the tariffs are expected to be fleshed out in the coming weeks, there are already signs that some of the world’s major companies are changing their behavior towards China in an effort to garner the affection of the Trump administration. Taiwan is considering making large purchases of US weapons, potentially in an effort not to become a target of Trump’s tariff programme. TSMC is also halting the production of their most advanced AI chips for their Chinese clients. They will no longer sell their most advanced AI chips with nodes smaller than 7 nanometers, in a direct nod to Trump and the US authorities.

Pushback against Trump’s America first agenda from chip provider

However, in a sign that the US could face protectionism under Trump, Taiwan’s technology protection rules would have to change to allow TSMC to manufacture their 2-nanometre chips abroad, or in Arizona, where they have a big manufacturing base. Although the Taiwanese government said that it may manufacture these chips abroad in the future, the principle is that the core technology will stay in Taiwan. Thus, Trump’s expected tariff policies may face some pushback. In after-hours trading, TSMC was mostly flat, however, we will be interested to see how the stock performs in the current environment, where Trump is dominating.

German politics now in focus

Elsewhere, other elections are also in focus. There is now the prospect of a no-confidence vote in the German parliament before Christmas. The ruling coalition is expected to lose this vote, which would open the door to a general election in February. The incumbent Scholz is maintaining that he can defy weak poll numbers and win, however, it is an uphill task. Germany’s economy is expected to register no growth this year, according to the IMF, which is a tough back drop for any party.

German stocks were well protected last week, and outperformed other European indices. However, Germany’s largest companies remain vulnerable to Trump’s America First agenda, which we think is of greater significance to German asset prices than this election. Also, there are fresh reports that car manufacturers will face fines for misleading on the pollution levels of their cars. While the exact models are not known, German car makers are likely to feature, which could weigh on the German auto maker sector at the start of the week.

Euro expected to remain under pressure

German bond yields have fallen along with other European sovereign yields in the past week, which has added to pressure on the euro. The single currency was the weakest performer in the G10 FX space last week, as the dollar was king. This is a reflection of how exposed Europe is to Trump, both economically and from a national defense standpoint. If Trump abandons Ukraine, the fear is that this could embolden Russia to threaten Europe’s national security. This existential threat is also weighing on the euro in our view. EUR/USD is close to its lowest level since June and is hovering around $1.07, and a recovery rally is a big ask at this stage.

Commodity watch

We will also be watching commodity markets closely. The gold price fell 1.9% last week, suggesting that gold was being used as a safe haven in the run up to the US election. Thus, we could have seen the high for gold in the short term. The Trump administration has also said that it will exempt Canadian oil imports from tariffs. It is unclear how this will impact the oil price in the longer term. In the short term, if could lead to some volatility, even though this move will ensure the flow of oil into the world’s largest economy, it could also exacerbate the supply issue that is weighing on the oil price this year.

While we continue to think that US politics will dominate financial markets, there are also some key economic releases to look out for next week.

US CPI and Retail Sales

While the US has entered a new economic epoch with the election of Donald Trump, the incoming data is still important in deciding whether or not the FOMC cut rates again in December. This the first of two inflation reports before the 19th of December FOMC meeting. Inflation is expected to have ticked higher in October, the headline CPI rate is expected to rise to 2.6% from 2.4%, the core rate is expected to remain steady at 3.3%. If the estimates are accurate, they could further reduce expectations of a rate cut from the Fed in December, as it would suggest that there is still inflation in the US system before Trump’s economic policies are signed into law next year. Retail sales are expected to have grown at a more moderate pace, which may be a function of the hurricanes.

UK wage data to keep BoE on guard for inflation pressures

In the UK, labor market data will be scrutinized to see whether wage prices have moderated. Monthly payrolls are expected to have declined by 13k in October, the 3-month-on-month unemployment rate is expected to rise a notch to 4.1% from 4% in August. Average weekly earnings are expected to rise a touch to a 3.9% quarterly rate, while excluding bonus, weekly earnings are expected to moderate to 4.7% from 4.9%. This data is expected to show that wage pressures remain stubborn in the UK. The unemployment rate may be rising, but at a slow pace that is not enough to weaken wages.

The interest rate futures market has mostly priced out the chance of a December rate cut from the BOE, instead there is a 74% probability of a cut in February. We doubt that an upward surprise to labour market data or wage growth will move the dial on a February rate cut, however, it could help boost the pound. GBP/USD fell last week along with other G7 currencies, however, it had lower volatility than its peers, and is currently hovering around $1.2920. The election of Trump makes it hard for the pound to stage a sustained rally in the medium term, in our view, although it may be more protected from a sharp sell off compared to other G7 currencies.