A number of events have shifted market sentiment early this week. The first is the nomination of Scott Bessent to the post of Treasury Secretary. Bessent is widely viewed as a credible bridge between Trump’s more aggressive stance on foreign trade and the traditionally tame approach to such matters. Although higher tariffs will still be pushed through, they are now expected to be imposed gradually, allowing for a more stable transition. Financial markets seemed to breathe a sigh of collective relief following the decision, leading the Dow to consecutive record highs over the past two sessions and the S&P 500 to a new all-time high on Tuesday. The second development is an apparent ceasefire in the Middle East. The agreement between Israel and Lebanon, brokered over the last few days, took hold at 4am local time today and requires both parties to stand down for an initial period of two months. The combined events drove a flight from Gold on Monday, causing the precious metal to fall an impressive 3.3%, or $90 per ounce. Oil prices also fell sharply, Brent Crude declining to $72 a barrel and WTI to $69. The sell-off even extended to the crypto markets, forcing Bitcoin down 5% on Monday after a failed attempt to breach $100k. With all drama, one could be forgiven for overlooking the FOMC minutes released last night. The transcript of the meeting held on the 7th of November revealed a level of uncertainty among board members. Mixed view were expressed; the path forward not so clear. The Fed will likely maintain a wait-and-see approach and sees no reason to rush forward with further rate cuts. The central bank does in fact have a decent amount of room to manoeuvre and seems unwilling to make any rash decisions. The next rate decision is still three weeks away and current CME odds favour a 25 bps cut, although no change is still very much on the cards. Later today, the Fed’s preferred inflation gauge will be released in the form of the PCE price index and members will no doubt pore over the data with a fine-tooth comb. US markets are closed on Thursday in observance of Thanksgiving. They will also close early on Friday.
US indices enjoyed a strong end to the week last Friday. The Dow in particular gained over 400 points, rising to a record high close as a number of stocks across the board outperformed. For once, tech stocks were not the driving force behind the push; Alphabet Inc (GOOGL) and Nvidia (NVDA) both ended the week on the back foot, losing 1.7% and 3.2% respectively. The Dow, S&P 500 and Nasdaq Comp all ended the week in the black, although the latter two failed to break new ground. Whatever accolades can be attributed to US indices, they pale in comparison to what we are currently witnessing in the mighty US Dollar. The DXY ended the week with a bang on Friday, closing around 107.5 but not before testing the waters around 108. The index now sits at a two-year high and competing currencies are really feeling the pressure. The Euro plummeted all the way down to $1.033 on Friday before staggering back above $1.04 for the day. Poor manufacturing data from Germany and France did their part to weigh on the common currency but a more immediate concern is the battle of interest rates. The ECB has proven all too willing to lower rates on the Euro in a bid to combat lacklustre growth whereas the Fed on the other hand has been surprisingly reticent. Next rate decisions are set for the 12th and 18th of December respectively. Another major factor moving forward is the incoming Trump presidency, which is expected to implement more protectionist policies and a firmer stance on international trade, further bolstering the Dollar, at least in the short term. Gold enjoyed a decent rally on Friday, gaining 1.7% to close back above $2,700 an ounce. The safe-haven trade once again working its magic. For now however, the spotlight is firmly on Bitcoin, which remains tantalisingly close to six figures.
Barring those who have been living under a rock over the last couple of months, traders may have noticed the meteoric rise in the US Dollar since the end of September. The Yen, the Mexican Peso and the Euro in particular have been getting hammered, the latter even threatening to reach parity with the USD. So why is this happening? “Trump” is the first thing that will come to the minds of many, and certainly explains part of what is going on, but there are other factors at play here. The Dollar had in fact been falling consistently since June, losing over 5% on the DXY before undergoing a violent reversal at the end of September. A major reason for this decline was simple interest rate positioning. Markets were expecting the Fed to rapidly lower interest rates on the Dollar due to a number of worrying economic data points earlier in the year. Gradually, markets realised these points were overplayed and rate cuts were not that necessary after all. The Fed has indeed been remarkably careful in lowering rates so far this year. Essentially, the Dollar was severely oversold. Eventually, the pendulum peaked and began to swing back. It just so happened that this coincided with a growing sentiment that a Trump presidency was once again on the cards. Betting markets painted a much clearer picture than the polls this year and it turns out they were right on the money. At this point, let us remind ourselves that the Euro makes up the majority of the DXY weighting, 57% in fact. So what is going on in Europe? The problems in the US economy may indeed have been overstated, but the same cannot be said for the European economy. First of all, Germany and France, the Eurozone’s largest contributors, continue to exhibit poor manufacturing figures as well as non-existent investor confidence. The European Central Bank is now on the difficult path of having to reduce interest rates in an effort to stimulate growth, on a currency that has already devalued significantly in recent months. On the other side of the Atlantic, the Fed is under no such pressure to reduce rates as quickly, having a lot more room to manoeuvre within a more robust economy. Rates on the Dollar are currently 4.75%, whereas the ECB has cut rates on the Euro down to 3.4%. Not a huge difference, but it is looking increasingly likely that this gap will widen as opposed to narrow. A growing interest rate differential will only put more pressure on the common currency, further devaluing the Euro and bolstering the Dollar. With that out of the way, what about President Donald Trump? Why would a Trump presidency strengthen the Dollar? In a nutshell: protectionism. Protectionist policies will increase tariffs on imported goods, which will likely reduce the amount of goods imported into the US, which affects the trade balance. Currently, the US has a trade deficit of about $80 billion. If the proposed measures are enough to shift this into a trade surplus, this will increase demand for the Greenback as the rest of the world needs the Dollar to pay for US products. Tariffs on foreign goods would also make domestic products more attractive, further favouring American businesses and the US economy in general. A minor caveat is that protectionist policies over a long enough time-frame can result in higher prices, potentially leading to inflation, which would devalue the Dollar. A much larger caveat lies in how other nations are likely to respond to additional tariffs, potentially leading to trade wars. What’s next for the Dollar? President Trump will inherit a very different economy from the one he got in 2017, so looking at historical data can only be so enlightening. The response of the likes of Europe, Mexico and China are equally difficult to predict. The Euro has only dipped below parity once since 2002 and even then it only stayed there for a couple of months. Place your bets.
The US Dollar and Bitcoin continue to dominate. For a brief moment it looked as though competing currencies had been offered a reprieve from the Greenback’s relentless onslaught, but alas it wasn’t to be. The DXY seized 107 yesterday – a new high for the year. The Euro decisively lost $1.05 and looks precarious to say the least. Cable has weathered the storm a little better but has also lost considerably, now down to $1.26. The Dollar may be showing considerable strength, but pales in comparison to the surge we are currently seeing in Bitcoin, which added another $4k to its tally yesterday to breach $98k. While many traders are asking the obvious question of when Bitcoin will enter six figure territory, other traders are wondering when the rest of the crypto market will catch up. Altcoins have been bleeding heavily against BTC for well over two years at this point, with no end in sight. Historically, the alt market has rallied in earnest only once Bitcoin has settled down after establishing a new all-time high. However, as crypto becomes increasingly intertwined with traditional finance, the old patterns become less reliable. A much more reliable trade has been the flight to gold as tensions between Russia and the West re-escalate. Events stepped up a notch yesterday after Russia launched an ICBM towards Ukraine, in response to Western-made long-range missiles used against it. Gold is up 4% this week, closing just shy of $2,670 an ounce on Thursday. Oil has experienced a similar rise this week but remains close to yearly lows.
The Dollar has finally eased off a little this week, allowing competing currencies to catching a long-awaited breath of air. The DXY attempted a push beyond 107 last week but it seems as though such plans have been abandoned for now, settling instead above 106 for the time being. Cryptocurrencies remain strong; Bitcoin is now becoming comfortable with the $90k level with BTC dominance around 60%. Attentions are shifting away from the Middle East and back towards Ukraine and Russia. The incoming administration has been admittedly less interested in the conflict, but let us remind ourselves that the incumbents still have a couple of months left in office. The escalation is perhaps responsible for the recent bounce back in gold, which climbed up to $2,640 an ounce yesterday, still around $150 shy of its record high set in late October. Oil prices have risen marginally this week but remain stubbornly near yearly lows. Brent Crude remains around $73 a barrel while West Texas Intermediate hovers just under $70. Any escalation with Russia will buoy crude prices, if only temporarily, but global supply and demand dynamics continue to put pressure on oil markets. Nvidia is once again back under the spotlight. Later today, after the closing bell, the chipmaker will release its latest earnings report. In anticipation of the event, Nvidia (NVDA) shares rose almost 5% yesterday to $147. Ravenous appetites from the artificial intelligence craze continue to fuel demand for chips and many analysts are already claiming the report will smash expectations. Time will tell.
The US Dollar is now at yearly highs, which seems incredible considering it was at yearly lows only six weeks ago. The DXY made yet another step up during yesterday’s session to close the day just under 107. The Euro continued to get hammered by the relentless push in the Greenback, now flirting with $1.05 and below. The Yen is also feeling the pressure, USDJPY climbing back above 156 yesterday and rising higher still this morning in Asia. During a speech in Dallas on Thursday, Jerome Powell told reporters that the Federal Reserve was in no rush to ease monetary policy. The comments dampened hopes for a final rate cut during the Fed’s final meeting of the year, scheduled for the 18th of December. Powell referred to a solid job market and inflation levels above 2% as justification for the stance. FedWatch odds for the final decision are now roughly 50-50 between a 25 bps cut and no change. Gold once again closed the day in the red on Thursday, making it five for five. It is fair to say that the safe-haven asset has reacted badly to the election of Donald Trump, falling over 6% since the 5th of November to $2,564 yesterday. Silver is not faring any better, closing just above $30 an ounce after briefly wicking below that level. Bitcoin experienced a minor pullback yesterday but remains around $88k at the time of writing. Meme coins have been popping off here and there during the course of this week, in moves reminiscent of the previous bull-run.
