MARKETSUS stocks closed out their best week since Donald Trump’s election, driven by stellar bank earnings, mega tech juggernauts and milder inflation figures that have boosted hopes for further interest rate cuts later this year.Stocks pared gains but still secured a close up by 1% or more on Friday, with the Dow Jones Industrial Average and the S&P 500 marking their best week since the optimism spurred by the November elections. This surge followed President-elect Trump’s proposals for tax cuts and deregulation, which fueled expectations of boosted corporate profits. Meanwhile, the Nasdaq Composite is also riding high, on track for a 2.7% weekly increase—its most robust performance since early December.This week’s rally was fueled by major banks like JPMorgan Chase, Goldman Sachs, and Citigroup, which reported significant profit increases due to a boom in trading and dealmaking activities.The chip sector stood out in this week’s market performance, significantly contributing to the strong close. Intel topped the S&P 500 gainers, surging 9% amid fresh buyout rumours.The significant takeaway from this week’s financial updates is the dual soothing inflation prints from the PPI and CPI reports. These have effectively removed the extreme risk of hawkish monetary policy, shifting market consensus from fears of a hard economic landing to more optimistic bets on a gentle touchdown.The combination of lower interest rate risks and strong corporate earnings provides a compelling mix that can typically rejuvenate depressed risk appetite, as we saw this week.The yield on 10-year Treasuries was little changed at 4.61%President-elect Trump’s inauguration on Monday is set to kickstart his tenure with an expected blitz of executive orders—reports suggest as many as 100 on day one alone. The financial world will be on high alert, especially for any clarity on implementing Trump’s proposed tariffs.Markets are bracing for the possibility that tariffs might be introduced sooner and at higher rates than anticipated. This move could dramatically flip the Federal Reserve’s policy script back to the uber-hawkish tail risk and potentially send US yields and the dollar skyrocketing, much to the dismay of global stock market investors. Hence, we could quickly find ourselves back in a state of monetary policy limbo.In the cryptocurrency sphere, Bitcoin surged 4% to breach the significant $100,000 threshold confidently. This rally is fueled by speculation around a potential executive order from Trump that could establish a strategic Bitcoin reserve. This action might ignite a cryptocurrency ‘arms race’ and fundamentally transform the landscape of financial markets.FOREX MARKETSAs we approach President Trump’s inauguration on Monday, the FX markets are tingling with anticipation. The potential for “day one” tariff measures looms large, and while some of this is baked into current valuations, there’s room for surprises that could rock the markets early next week.The dollar is in a precarious spot, notably overextended in its bullish run, which raises the stakes. Day One could see Trump unveiling tariff plans that have been the subject of much speculation. However, the dollar’s rally might hit a wall unless Trump rolls out aggressive, broad-spectrum tariffs.Currently, the U.S. dollar is notably overvalued against the euro, especially considering interest rate differentials that do not fully justify its strength. A more measured tariff rollout could send the euro/USD soaring by as much as 1.5%. Market charts suggest the euro is significantly oversold, setting the stage for potential disappointment among dollar bulls if the incoming administration opts for a moderated tariff approach.Investors should brace for volatility. The market’s direction could swing dramatically based on the scope and severity of Trump’s tariff announcements. This tension sets the stage for a week in which currency dynamics could pivot sharply based on how Trump’s trade strategies unfold, offering a potentially tumultuous start to his term.The yen has emerged as the standout performer among the G10 currencies this week, fueled partly by a drop in U.S. yields following subdued CPI data, but also by mounting expectations of a rate hike from the Bank of Japan (BoJ) next Friday. With the market now leaning towards anticipating a rate increase, all eyes are on whether potential policy announcements from President Trump could disrupt the yen’s upward trajectory. As we edge closer to the BoJ’s decision, the looming question is whether Trump’s actions might dampen the yen’s rally.In December, Japanese investors continued selling off foreign stocks and bonds for the third consecutive month, motivated by concerns over rising U.S. bond yields and significant fluctuations in the yen. According to data from Japan’s Ministry of Finance, investors offloaded overseas equities to the tune of 310.7 billion yen ($1.97 billion), building on the previous month’s substantial disposals worth 1.22 trillion yen. Additionally, they sold off 1.22 trillion yen in bonds, marking the most significant withdrawal since October 2024. This behaviour highlights a cautious stance toward international investment amidst unstable market conditions. Every Yuan trader I talk to seems to be banking on a weaker renminbi, playing a key role in buffering China’s economy against escalating tariffs. The USD/CNY has nudged up to the upper limit of the PBoC’s +/- 2.0% daily trading band early this year, signalling mounting selling pressure on the renminbi. Yet, the People’s Bank of China (PBoC) has maintained a stable daily fix, just shy of the 7.2000 mark, effectively capping any immediate spikes in USD/CNY, obviously worried about capital outflows.In an intriguing twist, while the renminbi holds steady against the dollar, it’s been gaining strength relative to other major trading partners’ currencies. The CFETS RMB index, which tracks the yuan against a basket of currencies, has surged about 3.5% since late September, hitting its highest mark since autumn 2022. This indicates a deliberate strategy by Chinese policymakers who seem committed to preserving renminbi stability in the face of global uncertainties.These developments align perfectly with my outlook for a moderate renminbi depreciation over the coming year. I bet on it reaching beyond 7.60 by mid-year. In the meantime, I’ll capitalize on the carry trade, collecting incremental swap gains and hope the US dollar continues its robust performance.OIL MARKETSOil futures dipped slightly on Friday, yet they are poised to secure a fourth consecutive week of gains. This upward trend has been fueled mainly by expanding sanctions against Russia’s energy sector, which have constricted supply lines significantly. Additionally, market sentiments are tinged with uncertainty regarding President-elect Donald Trump’s impending energy policy decisions, with his inauguration on Monday looming large. This anticipation keeps traders on edge as they weigh potential policy shifts impacting the energy markets.We’re experiencing a veritable whirlwind in the oil markets.I have to say, the recent effectiveness of sanctions against Russia’s oil sector caught many of us oil bears off guard. These sanctions have significantly disrupted Russia’s shadow fleet, making it difficult for them to unload cargo. Meanwhile, eased tensions in the Middle East, particularly around the Strait of Hormuz, have mitigated some of the earlier price spikes, allowing for smoother oil transit despite previous threats from Houthi rebels.However, with Trump set to return to the White House, I’m skeptical he’ll settle for WTI prices remaining in the upper $70s. His history suggests a possible push on Saudi Arabia to ramp up oil production. Trump has a knack for swaying oil leaders to his tune, and with OPEC+ holding back 5.8 million barrels per day—5.3% of the global production capacity—they could effectively counteract the impact of sanctions.As we look to 2025, I’m bracing for a tumultuous year for oil prices. The real uncertainty hinges on global oil demand, with China’s economic activities playing a critical role. After last year’s unexpected economic dip, a targeted stimulus could spark a demand rebound.Prepare for a year of dynamic shifts and possible upheavals in the crude oil markets. Trump’s unpredictability will likely intensify the usual price fluctuations. This isn’t just another year in the commodity markets—it’s one teetering on the precipice of significant geopolitical and economic shifts.NUTS & BOLTS ( USA)As we face the turbulent skies of potential tariffs, inflation’s downward trend seems to be losing momentum. The core Personal Consumption Expenditures (PCE) price index, the Federal Reserve’s preferred inflation measure, held steady at a 2.8% annual increase in November, aligning with this year’s average. Although there’s a slight comfort in seeing core prices increase at a slower pace of about 2.5% more recently, this trend persisted into December. Notably, the core Consumer Price Index (CPI) rose at an annualized 2.7% during the month, and typically, PCE inflation trails CPI due to its accounting for substitution effects.The inflation moderation has stabilized at the lower 3% range, both short-term and annually. Further insights come from the Cleveland Fed’s trimmed-mean and weighted-median CPI measures, both exceeding 3% across various time frames in December. This slowdown in disinflation may reflect a tightening labour market and vigorous consumer spending. While base effects could help reduce the annual inflation rate this year, a lasting improvement might hinge on a cooling in consumer spending—our base scenario anticipates a gradual return to target inflation by next year.This week also brought promising price reports. The National Federation of Independent Business survey indicated a modest uptick in small businesses raising prices despite a surge in economic optimism post-election. Similarly, the Federal Reserve’s Beige Book observed modest price increases, with some concerns about potential tariff-driven price hikes.The impact of tariffs on inflation could vary. If the labour market slackens under tariff pressures, as Fed Governor Waller suggests, any inflationary impacts might be short-lived. However, the extent and duration of tariffs, alongside business and consumer expectations of further tariff rounds, could embed a longer-term inflationary trend, mainly if goods prices stop declining while service prices remain elevated.The direction of fiscal policy also introduces additional uncertainty into inflation forecasts, with outcomes heavily influenced by the specific blend of tax cuts and spending adjustments proposed. This backdrop of heightened inflation concerns is partly why bond yields have escalated since the election, underscoring the complex interplay of economic policies and market expectations.NUTS & BOLTS (CHINA)China concluded 2024 on an upbeat note, propelled by an eleventh-hour policy surge that spurred real GDP to climb a stellar 5.4% year-over-year in Q4—outstripping the anticipated 5.0% and our estimate of 4.9%. This robust finish ensured China met its annual growth target head-on. Despite this superficial sheen, the undercurrents suggest a less rosy picture, with Beijing’s policymakers likely on high alert as they brace for potential tariff escalations under President-elect Donald Trump.The new year’s dawn injected fresh vigour into China’s economy, particularly against the backdrop of a challenging summer. This newfound resilience positions China more robustly against potential spikes in U.S.-led trade hostilities or a global pivot towards protectionism. However, the durability of recent gains—such as the significant jumps in industrial production and merchandise exports, spiking 6.2% and 10.7% year-on-year in December, respectively—might be fleeting. These increases are primarily seen as strategic moves by global businesses hedging against anticipated Trump tariffs.Retail dynamics have also seen a lift, modestly climbing by 3.7% year-on-year, buoyed significantly by state-sponsored incentives for purchasing household appliances and electric vehicles, now broadened to encompass a wider array of consumer electronics. This strategy mirrors direct cash handouts, aiming to stimulate domestic consumption.Yet, China’s domestic woes persist, especially with a stagnant job market and the residual shocks from the Evergrande crisis. These continue to dampen consumer spending through a profound negative wealth effect tied to the sluggish housing market. While there’s a glimmer of stability in housing prices outside top-tier cities, the real estate sector’s full recovery remains on a distant horizon. It is hampered by an oversupply of unsold new homes and developers struggling to finalize pre-sold properties.Amid these strains, China’s economic machinery remains highly susceptible to severe U.S. tariff hikes. Notably, China’s direct goods shipments to the U.S. have sharply declined as a percentage of GDP, now nearly half of what it was in 2017. Yet, this figure might obscure the deeper reliance on the U.S. market, as China has skillfully rerouted much of its export flow through alternate nations. Confronted with the threat of 60% tariffs, Beijing is poised to unleash a comprehensive suite of fiscal, monetary, and currency measures.China’s strategic fiscal and monetary interventions last autumn were timely, yet the road ahead demands more robust measures to fortify business and consumer confidence amid looming trade uncertainties. Given these challenges, our forecast for China’s real GDP growth in 2025 remains cautiously set at 4.5%, reflecting a guarded optimism about evolving global trade dynamics.CHART OF THE WEEKThe Key Number: 60 basis pointsRyan Hammond from Goldman Sachs Research’s US portfolio strategy team points out that US stocks typically have the resilience to weather a gradual increase in bond yields. However, the market dynamics shift drastically when there’s a sharp rise in 10-year Treasury yields—specifically, if they surge by two standard deviations within a month, which currently equates to about 60 basis points. Under such conditions, equities usually experience a decline. This sensitivity underscores the delicate balance between interest rates and equity performance, highlighting how significant yield fluctuations can influence stock market trends. More By This Author:Is It Time For Another Freaky Friday? It’s Been A While
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