Daily Digest: Wednesday 13th November
Is the ‘Trump Trade’ over?
It’s now been a week since former President Donald Trump was re-elected as President of the United States. Global equities alongside cryptocurrencies have rallied, with U.S. based companies being the primary beneficiaries with the major indexes breaking new price records almost daily. Tuesday marked the first material setbacks for those betting on the so-called ‘Trump Trade’, as asset prices saw their first major consolidations in light of the new administration. A shift in momentum has led newer market participants to question both the fundamental strength and sustainability of the political trade, as they attempt to establish whether this so-called ‘Trump Trade’ is trending towards its end. I’d argue that both a shift in momentum and opinion reinforces the fact that market participants do not need to panic. Instead, they should remain sensible and look to increase both their awareness and observations of key fundamental and technical cues.
In a very brief overview of US markets, CNN’s Fear & Greed index, a rough barometer of both market performance and trader emotions, indicates the current state of the market is ‘Greedy’. At face value, this aligns with the general trend of market, with the index reading 68, just 7 points shy of the extreme greed level. However, when you take a dive beyond the headline figures, the measure of stock price strength indicates that only 4.82% of NYSE listed stocks are hitting new highs against those trading at lows. This suggests that wider market gains are disproportionately influenced by a smaller number of over-performing firms, while traders remain cautious in backing individual constituents of the wider market. Furthermore, price depth, an indicator of the volume of shares traded within the market signals the presence of ‘fear’ and subsequently bearish momentum. This supports the idea that traders are exhibiting a higher level of caution toward the wider market and are not actively trading new positions.
Wednesday held in store one of the most important monthly macroeconomic data prints, US CPI figures for October. CPI serves a key role as a supporting data point for trader bets on the interest rate decisions of central banks. Where inflation is either under control or trending toward the Fed’s target of 2%, the likelihood of interest rate cuts is increased, which in the most basic form is accommodative of economic expansion and allows for cheaper debt funding on a firm level. However, if inflation is trending away from the respective central bank target, rate hikes are more likely as a tool to slow economic growth. This increases the cost of debt and often stunts equity performances, negatively impacting returns.
During their November meet, the Federal Reserve cut interest rates by 25 basis points, moving the target range from 4.75%-5% to 4.5%-4.75%, indicating relative confidence in domestic inflation controls. On a month-on-month basis for October, CPI came in at 0.2% in line with expectations, however, on an annualised basis inflation now sits at 2.6%, 0.2 percentage points higher than Septembers figures.
So what does this mean? Firstly, the data does not come as a total shock to analysts as figures fell in line with expectations, allowing markets to effectively price in the print in advance. However, on the flipside, figures show that while the Fed heads along its rate cutting path, inflation remains persistent, and now sits 0.6 percentage points above target for the fiscal year 2024. Looking to the Fed’s December meet, October data may cause traders to par back their bets on further rate cuts, in favour of awaiting additional key data points, notably PCE, which should provide a stronger image of inflationary strength.
As implied, equity markets were not too unpredictable with two of the three major indexes closing higher, quelling any immediate fears of further losses. The S&P 500 ($SPX) gained 1.39 points (0.023%) closing at 5,985.38, while the Dow ($INDU) closed 47.21 points (0.11%) higher at 43,958.19, with a session high just 345 points shy of its all-time highs. The Nasdaq 100 ($NDX) was the only major index to continue lower following Tuesday’s sell-offs, as declines extended some 34.63 points (0.16%) to 21,036.16. This can be attributed to tech losses, with sector constituents falling 0.48% during the session.
Once again, European markets remained relatively sheltered from any major fundamental changes, with only one key data print scheduled later this week. The UK’s FTSE 100 (FTSE) rose by 4.56 points (0.057%) to 8,030.33, while the Pan-European STOXX 600 (STOXX) continued lower, falling 0.64 points (0.13%) to 501.59. Turning to Asia, the Japanese Nikkei 225 (¥N225) fell a further 654.43 points (1.66%) to 38,721.66. This comes as no real surprise, as established yesterday the technical picture for the index remains weak, while I intend to explore fundamentals tomorrow. In China, the Shanghai Composite (¥SSE) managed to stem losses, rallying 17.31 points (0.51%) to 3,429.28, as equity performances hold strong in the face of a Trump Presidency and the potential re-emergence of a 2018 style trade war.
So is the ‘Trump Trade’ indeed over…well as things stand, no. Tuesday marked an important consolidation of prices as traders re-adjusted their portfolios and strategies based on higher asset pricing. Although the Nasdaq has continued to experience sell-offs, the wider market remains somewhat resilient, even if early momentum may now be slipping and short-term opportunities dwindle. The fundamental assumption behind the ‘Tump Trade’ - albeit fragile - is that Trump’s economic, business, and foreign policy commitments will drive asset prices higher, benefitting US businesses and citizens. The expectation being that markets should mimic their performances following Trump’s 2016 election. However, while President-Elect Trump is unable to enact policy changes until he formally takes office in January, there remains a considerable degree of uncertainty over his ability to deliver on key areas of his campaign manifesto. Heading into the new year, there will be emphasised importance on closely following policy developments as well as economic data in the US in order to best assess both the longevity and sustainability of the trade.
What to Watch Tomorrow
US PPI
US Crude Oil Inventories
Fed Chair Powell, ECB President Lagarde, & BOE Governor Bailey to speak at respective events
US Earnings
Walt Disney Company ($DIS)
Sources:
https://uk.finance.yahoo.com/world-indices/
https://uk.finance.yahoo.com/commodities
https://www.londonstockexchange.com/indices/ftse-100
https://www.binance.com/en-GB/price/bitcoin
https://www.binance.com/en-GB/price/ethereum
https://qontigo.com/index/sxxp/
Stock Market Activity Today & Latest Stock Market Trends | Nasdaq
https://coinmarketcap.com/charts/#market-cap
https://www.forexfactory.com
https://edition.cnn.com/markets/fear-and-greed
Definitions:
YoY - Year on Year, or, Year over Year
MoM - Month on Month, or, Month over Month
QoQ - Quarter on Quarter, or, Quarter over Quarter
ECB - European Central Bank
BOJ - Bank of Japan
Fed - Federal Reserve
BOE - Bank of England
SNB - Swiss National Bank
DOJ - Department of Justice