📉 Market Report.
🇨🇳 Weak data on the Chinese economy. China’s trade balance has increased, which is positive a priori. However, imports fell back into negative territory. The estimate was for a contraction of -1.5%, but the result was -2.3%, compared to 0.3% in the previous period. This indicates that domestic consumption in the Chinese economy continues to show weakness, which is worrying in the context of global and commodity markets.
🇺🇸 The US election outcome, with a likely Republican sweep, has led to a stronger dollar, higher US Treasury yields, and a rally in US equities. The focus is now shifting back to the state of the domestic US economy and how the Federal Reserve will respond. The market expects a dovish pivot from the Fed, with a 25bp rate cut priced in. For the euro, the collapse of the German government highlights the challenges facing the European economy, including weak domestic demand and the threat of a trade war with the US. This could keep the euro under pressure.
🇩🇪 The German ruling coalition collapsed as Chancellor Olaf Scholz sacked his finance minister, Christian Lindner, from the Free Democrats (FDP) party. Scholz plans to head a minority government with his Social Democrats and the Greens, and will hold a confidence vote in parliament that could trigger snap elections by the end of March. The collapse comes a day after the election of Donald Trump as U.S. president, adding to the political uncertainty in Europe’s largest economy. The government crisis is driven by disputes over budget policy and Germany’s economic direction, with the FDP opposing Scholz’s plans to suspend the debt brake and increase spending. Scholz accused Lindner of putting party interests before the country, while Lindner said Scholz lacked the strength to give Germany a new economic boost.
🌍 As we feared some time ago. Europe seems to have been caught in an impending trade war, between China and the US, and without its major energy ally, Russia, which supplied support to German industry. Investors are bracing for further economic pain in Europe, as a second Trump presidency raises the prospect of hefty tariffs, which could deepen euro losses and hurt European stocks. European bonds emerged as winners, as expectations of ECB rate cuts to counter an economic slowdown rose, though bets were generally contained. Trump has vowed a 20% tariff on imports from all countries, which would be a big blow for the EU, the largest exporter to the U.S. and with the second-largest trade deficit. European stocks initially rose but then cut gains, reflecting uncertainty over the extent and pace of Trump’s policies and their impact on the region.
📉 ECB Vice-President Luis de Guindos seems to agree with us. He warns that euro area growth may be weaker than expected and that new trade barriers could lead to a dangerous trade war.
📊 Tariffs were a major source of US government revenue for much of the country’s history, before largely being abandoned in favor of free trade policies starting in the 1930s. Donald Trump, who recently won a second term as US president, has proposed dramatically increasing tariffs to 60% on Chinese imports and 20% on imports from the rest of the world. Tariffs are paid by importers, but the costs are often passed on to consumers through higher prices. On the positive side is the protection of employment, on the negative side the loss of competitiveness and the increase of internal costs. The US is the world’s largest consumer, this is a key factor that gives it a huge advantage in the use of its tariffs for the time being.
💬 Today Powell will face questions about how the Fed will respond to Trump’s proposed policies, including across-the-board tariffs, tax cuts, and aggressive deportation of undocumented migrants. These policies are seen as inflationary, which could force the Fed to slow or pause its rate cuts, contrary to previous expectations. Powell will likely try to appear as apolitical as possible, but the stakes are high as Trump’s policies have the potential to significantly reshape the economic environment. Probably, Fed’s job of managing inflation and employment even more complex in the coming years.
📈 Market View:
📊 US stock markets reach new highs. Mini S&P 500 futures trade at record highs, reaching 5,970 points. The Dow Jones does the same and is on the verge of 21,000 points, currently trading at 20,945 points. Elon Musk’s inclusion in the Trump administration and his promise to create an innovation council are stirring interest in the US tech sector. His company Tesla rose sharply on the stock market yesterday.
💵 The dollar index has retreated over the past few hours after reaching close to 105.50 points, now trading at 104.85 points. The EUR/USD had a spectacular fall yesterday, down 2%, reaching the 1.07 area and bouncing up to 1.0750 at the moment.
📉 The European market is distancing itself from US equities. The DAX 40 had a bearish jolt yesterday, considering the political crisis in the country, and approached the 19,100 point area. The 55 and 200 moving averages are beginning to curve on its chart, and a bearish crossover of the two is not out of the question. The loss of 19,000 points could trigger a sharp correction. The Eurostoxx 50 also fails to advance and is currently trading at 4,845 points.
🛢️ The crude oil market remains strong, with Brent trading close to $75 per barrel and WTI trading above $71 per barrel. Trump’s arrival is encouraging the energy sector. ExxonMobil, the US oil major, posted a strong stock market rally yesterday, rising more than 3%, above resistance at $122.
🥇 Gold has stabilised after reaching support at $2,650 per ounce, and is trading close to that area.
💰 Bitcoin reaches new all-time highs, surpassing 76,000, celebrating the arrival of Trump to the administration, who has advocated cryptocurrencies as an alternative, as a CBDC will not be established in the US. Robert Kennedy suggested during the campaign that Bitcoin-backed US Treasury bonds could be issued, given the vast sum of bitcoins held by the US.
🌍 Geopolitics:
🇮🇱 Israelis protest Netanyahu’s decision to fire defence minister.
🕊️ Hamas is ready for peace as Trump promised yesterday to end all wars.
🇺🇦 Biden-Harris administration is set to send $6B to Ukraine before Donald Trump’s inauguration in January.
🇷🇺 Russian President Putin confirms his readiness to begin negotiations with Donald Trump.
