Weekly Overview 4. – 10. Nov 2024

The content of this post does not constitute financial advice. It is intended for information and education purposes only.

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The Week in Global Markets

Financial markets summary:

– EUROPE: The biggest news of the week was the re-election of Donald Trump as US president – and the European financial markets did not like it. Investors are now pricing in the major uncertainty about the potential impact of the economic shifts expected under a second Trump presidency, especially if Republicans control both the House and the Senate. The president-elect promised multiple times in the course of his campaign that he would impose a 10%-20% tariff on all foreign goods and a tariff of 60% or higher on products coming from China. The most affected countries will likely be Mexico, Canada, China, South Korea, Japan and the largest European economies. Trump can also unilaterally withdraw from international trade agreements, or use the threat of withdrawal as a way to renegotiate those deals. This could significantly dampen economic growth, in addition to the risks related to political turbulence. One example of the latter is that the German governing coalition (the “Ampel” or traffic light government, led by Olaf Scholz) fell apart in the aftermath of the US election as a result of long-standing disagreements between the leading parties (the socialists SPD and the Greens) and the smallest coalition partner, the liberal party FDP. As a result, the chancellor dismissed the leader of the FDP and Finance minister Lindner in the middle of the week and asked for a confidence vote in January, planning for an election in March. However, given the lack of support in the Bundestag, politicians are calling for an early election already in January. Major country stock indices and the Pan-European indices were down week-on-week, and the euro depreciated at one point by 2% against the US dollar, before recovering partially in the second part of the week. The Bank of England and the Swedish Riksbank both lowered their policy rates thanks to the deceleration of inflation, as the British pound appreciated against the USD. Market expectations are now shifting fast for the European economy in the context of the upcoming Trump presidency. Major banks and financial institutions (including Deutsche Bank) are now forecasting a 1.5% terminal rate by the ECB instead of 2.25%. Banks and currency traders are looking at a further depreciation of the euro against the USD – down to $1.05 in the coming weeks/months and probably parity later in 2025 when the full hit of the US protectionist policies becomes clear. Some portfolio managers see a very plausible path to parity in the next 6 months. There will likely be a starker divergence in policy rate development from now on across the Atlantic, directly impacting financial markets.

– UNITED STATES: The United States is bracing for a second Trump term in 2025-2028 – and the so-called “Trump Trade” performed accordingly last week. The S&P 500 jumped by more than back in 2016 after Trump was elected for the first time, and reached an all-time high of over 6,000 this Friday. US equities as a whole performed after the result of the election better than international equities, more or less in line with what was observed 8 years ago. Bitcoin skyrocketed, crossing the $80k threshold today and making new all-time highs. The Russell 2000 (representing small-cap companies) ripped higher, outpacing the major US indices as expectations for a better economic environment for small businesses under Trump translated into investor bets for better performance. A note of caution: prudent risk management in individual portfolios is necessary here as fundamentals are not yet reflective of this rising market optimism. Specifically, Russell 2000 earnings estimates are collapsing and EPS growth for the S&P 500 is declining. The top 8 mega-cap stocks (Alphabet, Apple, Amazon, Meta, Microsoft, Netflix, NVidia and Tesla) are now at a forward Price-to-Earnings ratio of 28.5x, the entire S&P 500 is at 22.2x, the S&P 400 (mid-caps) at 16.8x and the S&P 600 (small-caps) is at 16.7x. It is worth noting that the Bank of America Global Research data show that over the past 4 weeks, tech funds saw the most significant outflows in history – that was after the Nasdaq 100 index rallied 40% YoY. At the same time, Goldman Sachs data for October show that US household’s allocation to stocks has reached an all-time high, surpassing the allocation levels reached in 2000 (during the Dot-com bubble). The bank’s indicator implies that market sentiment seems to be extremely stretched at this point, based on positioning levels – similar to what was seen at the start of 2024.

– ASIA-PACIFIC: Despite some negative developments in corporate earnings guidance, the Japanese stock market gained this week as the Fed’s 25bp cut had a positive impact on investor optimism. After the US election result became apparent, the yen sold off against the US dollar but then appreciated later in the week. Monetary authorities are monitoring the moves and volatility in the currency markets and stand ready to take action if required – this was also confirmed by Finance Minister Kato. 10-year JGB yields rose to 1% as BoJ meeting minutes showed that the next move by the central bank could be another rate hike, as long as market developments and outlook realizations allow for it. In China, the impact of the additional government stimulus measures outweighed the worries related to the impact of US tariffs – at least for now. The Shanghai Composite and the CSI 300 both gained week-on-week. Exports increased more than expected in October at the fastest rate since July 2022, which led to a rise in the trade surplus. However, the uncertainty going forward has now become more glaring in the context of the anticipated Trump tariffs. The state announced that it will raise local governments’ debt ceiling and will allow them to issue 6tn yuan of additional special bonds over 3 years to swap hidden debts in an effort to reduce financial risks and help restart growth.

– BITCOIN: This was Bitcoin’s week: the result of the US election sparked a rally in the largest crypto (which is now spreading across other crypto assets), while other fiat alternatives such as gold plummeted. It just hit a record $80k on Sunday, but on November 7th, investor inflows reached a record $1.1bn into the BlackRock BTC ETF. The State Bank of Pakistan announced a proposal to turn digital assets such as cryptocurrencies (including BTC) into legal tender throughout the country and permission for state banks to start issuing digital currency. The US Senator from Wyoming reiterated her plan that, in the wake of Donald Trump’s election victory, they would be prepared to move forward with the establishment of a strategic Bitcoin reserve. However, some analysts point out that after this surge, as bulls have taken advantage of thin liquidity and drove the market rapidly higher, there is place for some skepticism about how sustainable these levels are now. There could potentially be some retracement during weekday times. Some forecast a dip back to $50k or below before another rally occurs.

policy rate overview

The Federal Reserve cut its target rate by 25bp, as expected, to the range of 4.5%-4.75% with a unanimous decision. The official statement is that there is now higher confidence that inflation will go back to target and that rates are still high enough that even with the cuts, economic activity will be affected. According to the FOMC, the risks to achieving the employment and inflation goals are largely in balance. However, with Donald Trump promising to significantly shift US economic policy, including taxation, fiscal spending, trade, etc., this could impact the expected development of the economy going forward and lead to a change in the central bank’s outlook – likely causing new rate expectations. At this point, it appears that markets are pricing in too many rate cuts. Borrowing costs have already been rising before this decision, leading mortgage rates to spike again. Market-implied probabilities show that the Fed is now expected to cut to about 3.6% by 2026, higher than what was expected in September (2.8%). According to the FedWatch tool, there is a 63% probability that the Fed will do another 25bp cut in December, but that probability has been in decline (from over 78% a month ago), while the probability of keeping rates steady until year-end has been rising. Markets have clearly been affected by the result of the election as well – with expectations for stronger growth, more inflation and a better situation in the labor market.

The Bank of England cut its bank rate by 25bp to 4.75% as expected, as inflation decelerated to a 3-year low in September (CPI was 1.7%). The decision was not unanimous (8-to-1). Governor Andrew Bailey said the BoE will watch the impact of the UK budget, adding “we are still in a world where there are very big global geopolitical shocks going on”. The central bank did not indicate whether it will reduce rates further as one of the expected impacts of the new budget is that inflation could go up again.