Category Archives: Fundamental Analysis

Investor exuberance has rarely been so optimistic. In a recent post, we discussed investor expectations of returns over the next year, according to the Conference Board’s Sentiment Index. To wit:

“Consumer confidence in higher stock prices in the next year remains at the highest since 2018, following the .“ (Note: this survey was completed before the Presidential Election.)

We also discussed , which, according to Federal Reserve data, have reached the highest levels on record.

In that article, we discussed the risk associated with high levels of investor exuberance.

“Risk isn’t always what it seems. When the market feels the safest, that’s often when it’s often the riskiest. Think about it — when everything is going smoothly, people tend to take more risks, which can lead to market bubbles and crashes.”

However, it is crucial to understand that “exuberance” is a necessary ingredient for pushing asset prices higher. This is why “.” In every market and asset class, the price is determined by supply and demand. If there are more buyers than sellers, then prices rise, and vice-versa. While economic, geopolitical, or financial data points may temporarily affect and shift the balance between those wanting to buy or sell, in the end, the price is solely determined by asset flows.

Currently, a liquidity surge supports investor exuberance, marked by enthusiastic buying and excessive risk-taking. As we will discuss, such activity often precedes significant market corrections.

While optimism can drive short-term gains, history shows that when sentiment runs too hot, and valuations detach from fundamentals, such leaves the markets vulnerable to declines.

The Psychology of Market Euphoria

Nobel Prize-winning economist Robert Shiller famously coined “irrational exuberance” to describe situations where speculative behavior pushes asset prices far above intrinsic values. Shiller’s research shows that emotional narratives and herd behavior dominate in bull markets, fueling market increases that eventually revert under the weight of reality. He warned that “markets can stay irrational longer than you can stay solvent,” reflecting how unpredictable and dangerous excessive optimism can become.

Similarly, Jeremy Grantham, a seasoned investor known for identifying bubbles, recently described the post-2009 bull market as an “epic bubble” driven by speculative behavior and extreme overvaluation. Unsurprisingly, as market prices increase, exuberance builds, and investors rationalize overvaluation by believing that “this time is different.”

However, with that said, as we discussed in “,“ valuations are a terrible market timing tool. Valuations only measure when prices are moving faster or slower than earnings. In other words, valuations are a measure of psychology in the short term. To wit:

“Valuation metrics are just that – a measure of current valuation. More importantly, when valuation metrics are excessive, it is a better measure of ‘investor psychology’ and the manifestation of the ‘greater fool theory.’ As shown, there is a high correlation between our composite consumer confidence index and trailing 1-year S&P 500 valuations.”

Investors repeatedly make the mistake of dismissing valuations in the short term because there is no immediate impact on price returns. However, as noted above, while valuations are HORRIBLE predictors of 12-month returns, they indicate “exuberance,” which impacts markets in the near term.

Understanding that valuations reflect psychological exuberance, what can we expect from markets over the next 12 months?

Expect Increased Volatility

As noted recently by Sentiment Trader:

“It almost doesn’t matter what measure we look at. There are some isolated exceptions, but most indications suggest that investors are optimistic about the prospects for stocks in the months ahead. It’s a different story in the bond market. After a brief bout of not-pessimism a couple of months ago, bond investors are back to feeling gloomy.

That difference of opinion on the relative merits of the two markets has caused the spread between stock and bond sentiment to spike close to a multi-decade high. Over the past 25 years, there haven’t been many times when the Intermediate-term Optimism Index for stocks was more than 50% higher than the Bond Optimism Index.”

“As for whether such a wide disparity in sentiment makes any difference, the table below shows S&P 500 returns after the spread between the two optimism indices reached 50%. And for the S&P, it was a short-term headwind. Its returns were particularly poor over the following month, with only two winners and five losers. However, only the signal during the post-dotcom bubble resulted in a sustained decline.” – Sentiment Trader

We see the same warning of investor exuberance by looking at the stock/bond ratio. The following chart compares the 52-day rate of change between the (SPY) and the iShares 20+ Year Treasury Bond ETF (NASDAQ:). The vertical lines correspond with both high levels of the stock/bond ratio rate of change and the Relative Strength Index of the .

Unsurprisingly, high levels of investor exuberance in stocks versus bonds have preceded either short-term pullbacks or larger corrections.

High levels of Investor exuberance increase correction risks because markets are more fragile when built on sentiment rather than fundamentals. As the enthusiasm fades, a small negative event, like disappointing earnings, geopolitical tensions, or concerning economic reports, can trigger a reversal between buyers and sellers.

When markets are propped up by speculative exuberance, corrections tend to be more severe. The recent “” blow-up shows that a sudden, unexpected, exogenous shock caused a sharp fall in asset prices. The problem with an exuberant market is that price declines create a feedback loop that accelerates the decline. Historical data confirms that pattern, where market exuberance, fueled by liquidity and investor mania, typically ends in rapid, painful corrections.

A Word of Caution: Timing Is Unpredictable

While investor exuberance sets the stage for corrections, predicting the exact timing is difficult. Alan Greenspan’s famous “irrational exuberance” speech in 1996 came three years before the dot-com peak. Markets can remain euphoric longer than expected, but corrections are inevitable as valuations eventually revert to more sustainable levels, as shown in the chart below.

However, as noted, timing is critical. Investors always make two primary mistakes when investing in an exuberant market. The first is overreacting to signals, believing a more severe correction is coming. The second is taking action too soon. Therefore, we must continue to navigate the market within the context of the current bullish trend.

As Sentiment Trader concluded:

“Sentiment and momentum are often in direct opposition. Just when things are looking best for trend-following momentum chasers, it looks the most at-risk for contrarian-minded investors. We’re reaching one of those times now, as momentum is impressive and compelling. There is little to no evidence that the gas has run out, as breadth remains robust and sector performance is supremely healthy. Extremes in sentiment tend to work better when there is less buying interest underlying the indexes. If we saw more divergences with breadth metrics, the extreme disparity in stock-bond sentiment would have more meaning. As it stands, it’s probably most useful as an early heads-up that conditions are ripe for disappointment, and we should be on guard for any signs of a buying strike in the weeks ahead.”

Practical Takeaways for Investors

Given the signs of elevated exuberance today, investors should consider the following strategies to manage risk:

• Rebalance Portfolios: Shift allocations toward defensive sectors or cash to reduce exposure to speculative assets.
• Limit Leverage: Avoid excessive use of margin to minimize forced selling risks.
• Monitor Indicators: Pay attention to the technicals, positioning changes, and fund flows for early warning signs.
• Consider Bonds: If bonds are out of favor as stock demand increases, a rotational “safety trade” is likely when volatility arises.

In summary, while optimism plays a role in market growth, unchecked exuberance often leads to corrections as markets adjust to reality. By recognizing the signs of market excess and managing risks proactively, investors can better navigate these uncertain periods and protect their portfolios from excessive drawdowns.

• Gold and oil suffer, while and equities rally
• Minority government in Japan, BoJ mini-minutes unsurprising
• Euro under pressure as Germany gets closer to snap election

Trump Prepares to Take Over

The markets continue to digest Trump’s victory and last Thursday’s dovish , with most market participants now speculating on the course of action of the new administration as the president-elect is assembling his cabinet. In this context, he has already taken the initiative to talk to Israel’s Netanyahu, Russia’s Putin and Ukraine’s Zelensky.

Gold and Oil Remain on the Back Foot

has been the main victim of the outcome of the US presidential election, losing around 3% from the early November highs. It is now trading above the $2,650 area, with the outlook remaining mostly bullish considering the two active conflicts and Trump’s unpredictable nature.

Similarly, prices remain on the back foot as concerns about China and global growth are elevated. Saturday’s Chinese inflation figures were again weak, with the market fearing deflation, particularly as the yearly change in the producer price index fell further into negative territory. Along with Friday’s announcements about local government debt, which were once again deemed as insufficient by the market, Chinese economic momentum remains negative. Meanwhile, China is preparing for a potential trade war with the US, a situation that could prove more challenging to tackle compared to Trump’s first term.

Equities and Cryptos Rally

On the flip side, equities and cryptocurrencies have benefited from Trump’s win. The closed 4.7% higher last week, recording its best weekly performance in a year, but lagged the . This small-caps stock index jumped by 8.6% on a weekly basis, the strongest weekly rally since April 2020.

Similarly, the crypto world is on fire with recording a new all-time high of around $81,800, and the market preparing for a continued rally towards the $90,000 level. The remaining major cryptocurrencies are also enjoying strong gains – for example ethereum is around 30% higher since election day – but most are still well below their all-time highs.

Partial Holiday in the US

A quieter session is in store today, as there is a partial bank holiday in the US. The rest of the week, though, is packed with key data releases, including Wednesday’s report and Friday’s US retail sales report. Also, a plethora of Fed speakers and more headlines about Trump’s new administration are expected to flood the airwaves.

Meanwhile, the is maintaining its post-US election gains with the euro being under pressure. has momentarily traded below 0.83000, the lowest level since April 2020, when the Covid pandemic was unfolding. The market is pessimistic about the area’s ability to navigate through four years of Trump’s administration, particularly as Germany remains the weakest link.

Chancellor Scholz’s plan for a March 2025 election has backfired with the opposition parties pushing for a confidence vote this week and snap elections to be held in mid-January. Amidst this environment, the market is pricing in a 15% probability for a 50bps ECB rate cut in December, with this likelihood most likely going up if next week’s preliminary PMI surveys disappoint.

Japan’s Ishiba Approved as PM, Outlook Remains Clouded

The summary of opinions – the first version of the October meeting’s minutes – did not produce any surprises as most members were on board with the continuation of the ongoing tightening process. Interestingly, BoJ members expressed concerns about the ’s depreciation. Meanwhile, LDP leader Ishiba has been approved as the prime minister of a minority government, since the smaller DPP party denied becoming the third coalition partner.

It’s difficult to count the number of mainstream macro theories that we’ve debunked over the past few years. Many long-used relationships and correlations have been upended by record monetary and fiscal stimulus during the pandemic, a wave of early retirements by Baby Boomers, and interest-rate hikes off ultralow levels.

We’ve been busy shooting them down since early 2022. Taking great pains to keep it short, below is a review of the 10 widely held macro theories that haven’t held water and the reasons that they’ve led many astray:

(1) Modern Monetary Theory

Melissa and I have said before that Modern Monetary Theory (MMT) isn’t modern, isn’t monetary, and isn’t a theory.

MMT’s proposition that a government that borrows in its own currency can finance its spending at will with more debt lost credibility as inflation soared in 2022 and 2023.

However, MMT seems to be working now that inflation has subsided. Even as the federal deficit remains very wide—and the consensus is that after the November elections, it will continue to widen—inflation has moderated to near 2.0%.

MMT’s zealots within the current administration have been essentially using a blank check to load up on fiscal stimulus even though the economy is already growing faster than 3.0% y/y. The interest cost on the federal debt is increasing rapidly due to the record debt issuance and higher rates.

It’s not the Fed’s job to lower rates to accommodate the government, as some have suggested because that would lead to more . The government instead needs to slow its pace of debt financing.

Without doing so, future generations will be saddled with a huge pile of debt that will hamper any stimulus efforts if and when there is a recession.

(2) Inverted yield curve

According to our Credit Crisis Cycle theory, the signals that bond investors are worried that higher short-term interest rates will cause a credit crisis and therefore a recession.

Because the Fed and Treasury prevented a credit crunch from emerging as regional banks collapsed last March, the expansion was able to continue.

(3) Disinverting yield curve

The Treasury yield curve has flipped positive in September, with the now roughly 15bps above the .

Historically, a recession has followed soon after such a disinversion—but only because the Fed was cutting interest rates rapidly to stem a crisis, which then morphed into a recession. This time around, the Fed is cutting rates as a preventative measure.

(4) Falling LEI

The 10 components of the LEI are heavily weighted toward the manufacturing sector and include things like the inverted yield curve.

That’s led the LEI to inaccurately predict a recession for the past two years. Goods consumption has stagnated at record highs since the Fed raised financing costs and demand for goods decreased after surging during the pandemic.

The US economy depends on services versus goods at a roughly 2:1 ratio, rendering the LEI less effective at predicting the economy’s performance.

(5) Phillips Curve

The Phillips Curve model is based on the inverse correlation between wage and price inflation versus the .

However, it ignores the inverse relationship between the unemployment rate and productivity growth. So inflation was able to fall in this cycle without a recession, in part because the tight labor market promoted investments that improved productivity.

(6) Neutral interest rate

Doves on the FOMC advocate for cutting the federal funds rate (FFR) in order to maintain a neutral real FFR. They worry that as inflation falls, the real FFR gets tighter and exerts unnecessary pressure on the economy.

We think that adjusting an overnight borrowing rate (which few consumers or businesses actually use) by the y/y change in inflation makes no sense. Empirically, the US economy has also done well despite a rising real rate.

We believe that productivity growth may be one of the most important factors in determining the neutral interest rate. Fiscal policy certainly matters as well. But the Fed commentators who oft-cite the neutral rate don’t seem to account for those two factors.

(7) Taylor Rule

The Taylor Rule is a mechanical formula for setting the FFR based on the unemployment rate (or economic growth) and inflation.

As inflation has fallen, proponents of the rule suggest rates should, too. However, the rule depends on knowing how high the economy’s potential growth is, and what the neutral unemployment rate is (the rate that neither raises nor weighs on inflation).

Of course, neither of these is measurable. If anything, we believe that higher productivity growth and immigration have raised the US economy’s potential, suggesting the model would advise a higher FFR.

Anyone using the Taylor rule to set monetary policy would have ended easing and started raising rates much sooner than this Fed did.

(8) Sahm Rule

The so-called Sahm Rule, a recession indicator based on the moving average of the headline unemployment rate, was triggered in July when the unemployment rate rose to 4.3%.

We dismissed this at the time as yet another false recession signal. That proved to be the right call, as the unemployment rate ticked down from 4.2% in August to 4.051% last month.

Besides, soaring unemployment is associated with credit crunches and recessions, not with real growing 3.0%.

(9) Excess saving

JP Morgan) CEO Jamie Dimon warned in December 2022 that the exhaustion of excess savings and inflation would “derail the economy and cause a mild or hard recession.”

We said that rising real wages, increased income from higher rates, and a very positive wealth effect would allow consumers to keep spending.

Baby Boomers in particular would “dissave” as they retired during the pandemic, and soaring home and stock values would embolden them to spend.

The latest revision from the Bureau of Economic Analysis found that nonlabor incomes were much higher in 2022 and 2023 than it had believed, which raised the personal saving rate from 3.3% to 5.2% as of Q2.

It seems consumers haven’t exhausted their savings after all.

(10) Money matters

M2 money supply contracted from November 2022 through March 2024. Yet the stock market enjoyed a huge bull run and inflation moderated. That should have quieted the monetarist view that inflation is everywhere and always a monetary phenomenon.

Perhaps monetary policy is not the most important factor for economic growth. Productivity attributable to the efforts of the private sector may be more important, in our opinion.

Furthermore, fiscal policy may quicken money velocity and encourage more consumer spending and business investment.

Original Post

• After Trump comeback, normality to return to markets with US CPI.
• GDP data from UK and Japan to also be important.
• But volatility to likely persist as markets assess impact of Trump 2.0.

US CPI eyed as rate cut bets fade after Trump win

Donald Trump’s historic return to the White House was met with a euphoric response by the markets. Wall Street and rallied to record highs, while the skyrocketed to 4-month highs. Perhaps the most significant move, however, is the surge in Treasury yields.

Yields had already been on the rise since late September as investors pared back their bets of how many times the would cut over the course of the next 2-3 years. But Trump’s victory has dealt a further blow to hopes of low interest rates.

If Trump enacts his campaign pledges of lower taxes and higher tariffs, the expected effect on the economy is that this would push up prices by boosting domestic demand and raising import costs. The Fed would have little choice but to maintain restrictive monetary policy for longer than is currently anticipated.

The October report due on Wednesday will be the first post-election test for rate cut bets following the repricing from the ‘Trump trade’. In September, the headline CPI rate fell to 2.4% y/y. However, it is expected to have edged up to 2.5 y/y in October. The month-on-month rate is projected at 0.2%, unchanged from the prior month. Core CPI is also forecast to have ticked up, rising from 3.3% to 3.4% y/y in October.

Source: LSEG Datastream

On Thursday, producer prices for the same month will also be watched, while on Friday, attention will turn to the retail sales report. Other releases will include the Empire State Manufacturing index and industrial production, both due on Friday.

Should the CPI numbers come in below expectations, yields and the dollar will be at risk of correcting lower following the recent sharp gains. However, if the data continue to surprise to the upside, the greenback’s bullish run might have further to go. This could prove problematic for Wall Street, though, as sooner or later, higher yields would begin to bite for Wall Street traders.

Can UK data halt the pound’s slide?

US yields are not the only ones soaring lately. The yield on UK government gilts has risen by more than 20 basis points since the country’s new Labour government presented its tax and spend budget on October 30. Despite tax hikes amounting to £40 billion, the budget is seen as increasing the government’s borrowing requirements, as spending looks set to rise faster than the tax intake. Moreover, much of the spending increases will be frontloaded in the first two years of the parliamentary term, potentially lifting growth in the current fiscal year and next.

The Bank of England has already incorporated the Budget impact into its economic projections and has signalled it will have to maintain caution on the pace of easing. Wage growth remains a concern despite falling substantially this year. The latest figures on average weekly earnings are out on Tuesday, as well as the employment change for the three months to September.

GDP stats will follow on Friday with the first estimate for the third quarter. The UK economy is forecast to have grown by 0.2% q/q during the quarter, slowing from the prior quarter’s 0.5% pace.

Source: LSEG Datastream

Faster-than-expected growth in Q3 would further dash hopes of the BoE speeding up rate cuts over the coming months, and this may help the pound recoup some of its recent losses versus the greenback.

Euro could take to the sidelines

The has also been under strain lately amid a gloomier Eurozone outlook compared to other major economies. Nevertheless, Q3 growth surprised to the upside and the preliminary reading of 0.4% q/q will likely be confirmed in the second estimate on Thursday. Quarterly employment growth numbers are also on the agenda on Thursday, as well as September .

Ahead of those releases, Germany’s ZEW economic sentiment survey might attract some attention on Tuesday. However, investors might be more interested in the political happenings in Germany following the collapse of the coalition government. Snap elections are looming, which may take place as early as January. A change in government in Berlin might pave the way for a reform of the country’s debt brake rule, which limits new borrowing to 0.35% of GDP.

Source: LSEG Datastream

However, any reaction in the euro is likely to be muted for now and the single currency will likely have a calmer time following the volatility of the past week.

Can Japanese GDP revive the yen?

The losses of since mid-September deepened after the US elections as the dollar jumped to a three-month high of 154.71 yen. But the primary reason for the yen’s negative reversal is the uncertainty around the timing of the Bank of Japan’s next .

Investors are currently assigning around a 40% probability for a 25-basis-point rate rise in December. But the BoJ may decide to wait until after next year’s annual spring wage negotiations before making up its mind.

For expectations for an earlier rate cut to strengthen, there would have to be a significant improvement in both the growth and inflation data. Hence, better-than-forecast GDP numbers for Q3 on Friday could lift the yen slightly.

Source: LSEG Datastream

The latest UK government budget, which saw big tax rises but even bigger spending increases projected for 2025-26, has forced markets to rethink Bank of England expectations. Rates are expected to stay above 4% for the next two years, which would mean considerably fewer rate cuts overall in this cycle than the ECB or the Federal Reserve.

Investors also seem to have concluded in the immediate aftermath of Donald Trump’s election that the assumed hit to European growth (which the UK isn’t immune to), will have a more marginal impact on the Bank of England’s rate-cutting cycle, relative to the ECB.

We think this is misplaced. Services inflation, the key guiding light for the BoE, has been undershooting central bank projections. If that continues in the new year – and we think it will – then that is likely to be a catalyst for faster rate cuts through the spring.

Admittedly, we agree with markets that a December rate cut now looks less likely, though it remains possible should the two intervening inflation reports prove more benign than anticipated. Our base case is that the Bank will cut rates again in February, and at at every meeting thereafter until rates reach 3.25%.

Federal Reserve

We had previously looked for the Federal Reserve to cut its policy rate down to 3.5% by next summer on the view that the central bank felt it had scope to loosen policy closer to neutral, in an environment where the jobs market is cooling and inflation is less of a threat. However, the likely Republican clean sweep of the presidency, the House and the Senate gives Donald Trump the power to push ahead forcibly with his plans for immigration controls, tax cuts and higher tariffs on goods. This may generate a stronger growth story in the near term, but with more inflation pressures over the medium to longer term – which may make the Fed more reluctant to cut interest rates as far and as quickly as we had previously expected.

A 50bp cut in September and a in November are still expected to be followed by a 25bp interest rate cut in December, but there is now a greater chance of a pause at the January FOMC meeting. Indeed, rather than cutting rates 50bp per quarter, we are now favouring 25bp per quarter from the first quarter of 2025 with rates perhaps bottoming higher than we previously thought at 3.75% in the third quarter of 2025.

This would still be above what we would term the “neutral” rate, which is itself likely to shift higher since the Fed may take the view that if fiscal policy is going to be kept looser by president-elect Trump relative to its previous baseline forecast, then it needs to run monetary policy tighter to keep inflation at its 2% target.

There may be some speculation that given Trump’s sweeping mandate he may choose to exert more influence or control over the Federal Reserve. Chair Jerome Powell would undoubtedly push back against this, thereby asserting the Fed’s independence. However, Powell’s term expires in February 2026 and Trump could nominate a candidate that is more willing to accommodate his views on interest rate policy.

That all said, the likelihood of rising term premium (resulting from inflation fears and large fiscal deficits) implies the prospect of a higher and steeper Treasury yield curve. This will push up both household and corporate borrowing costs and with the likely to strengthen further, monetary conditions will become tighter. This may mean the Fed feels it doesn’t need to hike short-term rates in 2026 despite tariffs likely pushing inflation above target.

European Central Bank

October was the month of an important turnaround at the ECB. Instead of inflation concerns related to still-high and sticky domestic inflation, it seems that growth concerns have become the predominant factor driving monetary policy. As a result, the ECB has stepped up the pace at which it is reducing interest rates, and a further stepping up with larger sized rate cuts can no longer be excluded.

However, with eurozone GDP growth in the third quarter being higher than the ECB’s September projections (0.4% quarter-on-quarter vs 0.2%) and inflation rebounding in October, some ECB members might start doubting the chosen U-turn. Everything seemed as if the ECB’s December meeting would be affected by two main questions: were the disinflationary trends just halted at the end of October, or are they for real? And will the ECB acknowledge structural weakness in the eurozone economy, or continue believing in a return to potential growth from early 2025 onwards?

That was before the US elections. With the outcome now clear, risks to the eurozone growth outlook have clearly shifted to the downside and a 50bp rate cut at the December meeting has again become more likely. Even if the ECB normally doesn’t speculate about possible policy changes elsewhere, it would be almost irresponsible not to take the US elections into account. At least if the central bank wants to get ahead of the curve.

And getting ahead of the curve seems to be an important motive for the ECB currently. Having been slow to address rising inflation and arguably late in stopping rate hikes last year, it now appears determined to get ahead of the curve and return interest rates to neutral as quickly as possible. For the doves, this is a no-brainer, and for the hawks, the argument might be that getting rates back to neutral quickly could be enough to avoid another episode of unconventional monetary policy with quantitative easing and negative interest rates further down the line.

With the incoming Trump administration posing new economic risks for the eurozone, we now expect the ECB to cut interest rates to around 1.75% by next summer, below neutral levels. While this will be an attempt to support growth in the eurozone, the longer term inflation picture has not changed. ‘Greenflation’, demographics and changes to globalisation are still likely to push up price pressures over the longer term.

It clearly looks as if the ECB will be caught for a long while between disinflationary risks in the short term and inflationary risks in the long term.

Disclaimer: This publication has been prepared by ING solely for information purposes irrespective of a particular user’s means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

Original Post

Gold Dropped More Than 3% After Trump’s Victory

On Wednesday, corrected downwards sharply following the announcement of Donald Trump’s victory in the 2024 US presidential election. () declined by more than 3%, and the price returned to the mid-October level of $2,650.

Investors now anticipate that Trump’s policies on tax cuts and tariffs will significantly impact inflation growth, affecting the stock market and the . These expectations have led to a decrease in gold prices. The market has already factored in these negative developments for gold based on Donald Trump’s economic policies, which he presented as a part of his election campaign.

The will announce its rate decision on Thursday at 7:00 p.m. UTC, followed by a speech from Chairman Jerome Powell. Markets are anticipating a 25-basis-point interest rate reduction. However, the upcoming press conference is more important as it will provide hints on future actions of the US central bank. Jerome Powell will likely recognize the recent challenges in the labor market and the efforts made to combat inflation. Still, Trump’s return to the White House could lead the Fed to consider slowing down its easing measures as Trump’s economic policies are considered to be highly inflationary.

In the near future, gold may decline and test the support level at $2,625. The XAU/USD trend will depend on today’s Fed interest rate decision, the statement, and Powell’s comments at the press conference. Thus, traders may expect increased volatility today.

Euro Rebounds After Dropping to a Five-Month Low

The euro () plunged by 1.82% against the US Dollar on Wednesday after Republican Donald Trump won the US presidential election.

The market largely assumes that Trump’s policies on immigration, tax, and trade will speed up US economic growth and lead to higher inflation, likely preventing the Fed from cutting interest rates in 2025. As a result, the market has already started to price in a tighter US monetary policy than the eurozone’s. Traders are factoring in a 67% chance the Fed will also cut in December, down from 77% on Tuesday, according to the CME Group’s (NASDAQ:) FedWatch Tool.

Furthermore, there is a risk that the Trump administration may impose new tariffs on certain European goods. This development will dent the eurozone’s exports and slow the economy, potentially forcing the European Central Bank (ECB) to cut borrowing costs more aggressively. At the same time, Trump has stated a preference for a weak US currency.

„Both this year, but also during his previous stay at the White House, he had essentially challenged the longstanding strong dollar mantra because he prefers a weaker currency to help with exports and American economic activity,” said Nikos Tzabouras, senior market specialist at trading platform Tradu.

This apparent divergence between market beliefs and Trump’s goals is a major complicating factor for the greenback’s long-term outlook.

EUR/USD was rising during the Asian and early European trading sessions. A technical rebound is expected after the pair dropped to a five-month low on Wednesday, but gains will likely be capped by the strong resistance at 1.07600. Today, the main event is the Fed’s interest rate decision, due at 7:00 p.m. UTC. Traders expect the US central bank to cut its base interest rate by 25 basis points (bps).

New details revealed in the FOMC Statement and at the press conference may give insights into the future US monetary policy. If the Fed downgrades its economic forecast and Fed Chair Jerome Powell hints that more rate cuts are coming, EUR/USD will rise sharply. If the FOMC Statement includes better economic assessments and Jerome Powell makes hawkish statements or sounds less dovish than the market expects, EUR/USD may drop and set a new low. In the wake of the US presidential election, the risks of a more hawkish outlook in the FOMC Statement have increased, so traders should be particularly cautious today.

British Pounds Decline Slows Ahead of Two Interest Rate Decisions

The British pound () declined by 1.24% yesterday due to the US election results. GBP faces uncertainty ahead of today’s Bank of England (BOE) and Federal Fed rate decisions that could add downward pressure to GBP/USD.

As markets recovered from initial volatility and the US Dollar buying spree slowed during the US trading session, market participants turned their attention to upcoming central banks’ meetings. The two central banks—the BOE and the Fed—are expected to announce rate cuts in the upcoming meetings. The BOE will likely cut for the second time since 2020. Still, the market will focus on whether this action signals the future direction of monetary policy after the recent inflationary budget announcement by the government.

On Thursday, the US Dollar was hovering just beneath its four-month high as the market absorbed the news of Donald Trump’s victory in the US presidential race. Investors also closely monitor the actions of central banks, with the Fed expected to announce a reduction in interest rates later today. Market participants were speculating whether the Fed would maintain its steady pace of rate cuts or slow it down. Trump’s victory has raised questions about the central bank’s plans, with some suggesting that the regulator may slow its easing cycle. Based on the CME FedWatch Tool, there is a 67% probability that the Fed will reduce rates again next month, down from yesterday’s 77%.

GBP/USD has been recovering during Asian and early European trading hours. On Thursday, the BOE rate decision will be announced at 12:00 p.m. UTC, and the Fed interest rate decision will come out at 7:00 p.m. UTC. These two events will add volatility to the GBP/USD.

• Dollar has rallied as Donald Trump’s policies are seen as inflationary.
• Stocks celebrated prospect of tax cuts and deregulation.
• Bitcoin has hit fresh record high, but oil has retreated.

Trump Knocks the White House Door

The skyrocketed during the Asian session on Wednesday, and it appeared to be headed for its biggest one-day gain since March 2020.

Following the closing of the election ballots in the US, former president Donald Trump’s return to the White House fueled the so-called ‘Trump trades’, with the US dollar beginning to climb north on early indications that the Republican candidate was likely to secure the key battleground state of Georgia.

Trump also defeated Democrat candidate Kamala Harris in the critical states of North Carolina and Pennsylvania, with the latter putting him three electoral votes short of winning the presidency.

Inflationary Policies Imply Slower Fed Cuts

The former president’s policies, which include massive tax cuts and tariffs on imported goods from around the globe, especially from China, are seen as inflationary, thereby raising the likelihood of the proceeding with slower rate cuts from here onwards. That’s why his lead turbocharged the US dollar.

Indeed, Treasury yields also rose, and according to Fed fund futures, although investors remained convinced that the by 25bps on Thursday, speculation of a pause in December has increased. The probability of not acting in December rose back to 32%. Now, it remains to be seen whether the Fed will indeed sound more cautious this week about future policy moves.

Wall Street Surges on Tax Cuts and Less Regulation

The prospect of lower taxes and less corporate regulation under a Trump presidency buoyed stocks, with all three of Wall Street’s main indices gaining more than 1% on Tuesday and the futures market pointing to a stronger open on Wednesday.

However, the Trump 2.0 era may not be smooth sailing for Wall Street, as the imposition of tariffs and bets of even slower rate reductions by the Fed may be reasons for steep corrective pullbacks.

Some policies may need to pass through Congress to become laws. But with Republicans securing the Senate and leading the battle for the House, a unified government under President Trump will have a lot of freedom in deciding on fiscal policy.

Gold and Oil Pull Back, Bitcoin Enters Uncharted Territory

surrendered to the stronger US dollar, but the losses were contained, and a recovery began during the early European hours, as the uncertainty surrounding a Trump government may be a reason for some investors to maintain exposure to this safe-haven asset.

was also part of the ‘Trump trade’, flying more than 9% today and reaching a fresh record high of around $75,390.

on the other hand pulled back after hitting resistance slightly above the key territory of $72.70.

Besides the pullback in commodities due a stronger dollar, the pressure on the Chinese economy from Trump’s policies could weigh on demand from the world’s top crude importer.

In his 2022 Berkshire Hathaway (NYSE:) shareholder letter, Warren Buffett wrote that in his 80 years of investing, he had “yet to see a time when it made sense to make a long-term bet against America.”

Buffett’s words have rarely been more relevant. With only a day remaining before the presidential election, history shows that regardless of who’s in power, the U.S. has consistently outperformed its global peers and rewarded those who stayed the course.

That’s why we made the tough yet necessary decision two years ago to close our Emerging Europe fund. Why? Because, compared to the opportunities here at home, Europe just isn’t competitive. Sluggish growth and regulatory hurdles weigh heavily on the continent’s economic potential. Outside of its massive luxury market, Europe is a cautionary tale, reminding us of the risks of over-regulation and slow-moving policy.

America Remains the Innovation Leader

Despite all the predictions of a recession, the U.S. economy is leading the pack. According to the International Monetary Fund (IMF)’s most recent projection, the country is on track for 2.8% growth this year, outpacing every other G7 economy.

Just look at the tech sector: The vast majority of the world’s leading tech companies are based in the U.S., benefitting from robust early- and late-stage financing, an unmatched talent pool and a regulatory environment that—while imperfect—allows businesses to grow and thrive. Over the past few decades, America’s ability to foster true innovation giants—like Apple (NASDAQ:), Google (NASDAQ:) and Amazon (NASDAQ:)—has only strengthened.

Europe, by contrast, lags behind, shackled by red tape and an over-cautious approach to investing in new technologies. This past summer, in fact, Meta (Facebook (NASDAQ:)) and Apple pulled back from rolling out key products in Europe due to regulatory hurdles. To be clear, Europe has plenty of strong universities and bright minds, but its draconian laws stifle its own growth.

America Innovates While Europe Regulates

In the past two decades, the U.S. stock market has been a powerhouse. Just before the 2008 financial crisis, the market cap of the was marginally higher than that of the . Since then, the U.S. market has expanded eightfold while the European market has barely budged. Companies across the Atlantic are now listing on U.S. exchanges, drawn to our more dynamic financial markets.

When I look at Europe’s economic trajectory, I can see why many people are hesitant to invest there. Again, we closed our Emerging Europe fund because of these same issues. While America innovates, Europe regulates. And as more businesses gravitate toward the NYSE and , the reality is clear: America remains the best place to invest, even in times of political change.

I’m not alone in believing that. According to the Conference Board’s most recent survey of investors, a record 51.4% of respondents said they expected the current stock market rally to continue over the next year. 

The Challenges Here Are Real but Manageable

To be fair, the U.S. isn’t without its own set of challenges. The national debt has climbed to $35.8 trillion, and consumer credit card debt is at a 20-year high.

Inflation may be down from its peak, but the risk of a resurgence remains. Many remember the double-digit inflation spikes of the 1970s, fueled by government spending, an crisis and a weakening after the collapse of Bretton Woods. Some fear a repeat scenario today as debt continues to climb. But let’s remember that even during the 1970s—one of the most volatile decades for the U.S. economy—investors who stayed the course were ultimately rewarded.

The Case for Staying Invested in America

Many readers may be concerned about the upcoming election and the policy shifts it could bring, but betting against America is not a winning strategy. In boom times as well as bust, the U.S. has outperformed. Our economy is innovative, and our financial systems are built to withstand change. Political cycles come and go, yet America continues to lead the world in growth and opportunity.

Remember Buffett’s words: Betting on America has historically paid off. And with the right strategies in place—like a healthy allocation to —you can continue to build and hold your wealth for generations to come.

Disclaimer: Past performance does not guarantee future results. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

The S&P 500 is a market index that represents the performance of about 500 companies in the United States. The STOXX Europe 600 index represents large, mid and small capitalization companies across 17 countries of the European region.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more of U.S. Global Investors Funds as of 9/30/2024: Amazon.com Inc.

• Nonfarm payrolls slow to the smallest gain since Dec 2020
• Dollar opens Monday with negative gap on US election poll
• What will Fed officials decide just after the election?
• RBA gets the ball rolling tonight; expected to stand pat

Dollar Brushes Off Very Weak Nonfarm Payrolls

The finished Friday’s session up against most of its major peers, despite nonfarm payrolls slowing to 12k last month, the smallest gain since December 2020.

Despite the surprisingly low number, the market brushed off the report, considering it an outlier rather than painting a clear picture of the US labor market and the broader health of the economy. Indeed, job growth almost stalled in October due to strikes by aerospace factory workers and as hurricanes shortened the collection period for payrolls.

The response rate dropped as well to 47.4%, which is the lowest since January 1991 and well below the 69.2% average for October in the last 5 years.

Poll Shows Harris Taking a Lead in Iowa; Dollar Pulls Back

Having said all that though, the greenback was unable to hold onto Friday’s gains, opening today’s session with a negative gap as, according to a US election poll released on Saturday, US Democratic presidential candidate Kamala Harris has taken a lead of three percentage points in Iowa, a state that Trump easily won in 2016 and 2020 and had a 4-point lead just a few months ago in September.

Trump has pledged to cut taxes and impose import tariffs, especially on Chinese goods, policies that are seen as inflationary.  Therefore, whenever his chances of returning to the Oval Office were increasing, the US dollar strengthened as higher inflation could mean slower rate reductions by the Fed. Perhaps that’s why the dollar reacted negatively to the poll showing that Trump is losing Iowa.

This also corroborates the notion that a potential Harris win will result in a weaker dollar, despite Harris being considered the current administration’s continuity candidate, as her policies are not seen to be as inflationary as Trump’s.

Will the Election Outcome Impact Fed Thinking?

How a new president will impact the Fed’s thinking will start being revealed on Thursday, as just two days after the US elections, the Fed will decide on interest rates. The Committee is widely anticipated to cut interest rates by 25bps, but there has been a decent chance for a pause in December.

Ahead of the US jobs data, that probability was 30%. However, after the slowdown in nonfarm payrolls and after the weekend poll showing Trump is losing Iowa, that chance dropped to around 17%. Should Fed officials indeed appear more cautious on future rate reductions after a potential Trump win, Treasury yields may rise further, and the US dollar could enjoy gains.

RBA Could Remain on Hold for a While Longer

Nonetheless, for now, central bank enthusiasts may turn their attention to the RBA policy decision due out tonight. Australian policymakers have not hit the rate cut button yet, noting at their September meeting that underlying inflation remains too high.

With inflation expectations also remaining elevated, it is unlikely for this Bank to cut rates this time. Investors are not expecting a cut in December either, assigning only a 20% chance for such a move.

Thus, if their view is confirmed, the may instantly gain some ground, but its latest downtrend may not be reversed until traders become convinced that China will proceed with meaningful measures to shore up its economy. China’s National People’s Congress (NPC) standing committee meets this week, and it will be interesting to see whether more details on stimulus will be revealed.

• Traders lock gaze on Tuesday’s US election
• Trump and Harris battle neck and neck in the final stretch
• Fed to decide whether to cut interest rates
• RBA and BoE decisions are also on next week’s agenda

The flexed its muscles lately on the back of upbeat data suggesting that there is no need for the to deliver another bold 50bps rate cut at the remaining gatherings of the year, but also due to increasing market bets that Donald Trump will return to the White House.

It’s US election time!

The day when US citizens will decide whether this will be the case or not has come. While some Americans have already cast their vote, the official election day is on Tuesday, with candidates Donald Trump and Kamala Harris battling neck and neck for the Oval Office. Although Harris entered the race with a decent lead, the gap narrowed significantly over the past few days, with the outcome hinging on battleground states.

Trump has pledged to cut taxes and impose import tariffs, especially on Chinese goods, policies that are seen as inflationary. Therefore, a Trump victory may raise speculation for even slower rate reductions by the Fed and thereby drive Treasury yields and the US dollar even higher.

The question is how the stock market will perform. Tax cuts and deregulation may be positive developments for Wall Street, but tariffs and slower rate cuts are not. Thus, even if stocks trade north just after a potential Trump win, a pullback may be on the cards in the not-too-distant future.

With the dollar and Wall Street gaining on increasing bets of a Trump win, a potential Harris victory may have the opposite market impact as her plans do not include massive tax cuts as Trump is promising. Having said that though, whether any policies will be implemented will depend on the composition of the Congress.

What will the Fed do after the election?

We may get a first idea on how the election outcome may affect the thinking within the Fed just two days later as on Thursday, the Committee announces its monetary policy decision. With the latest US data pointing to improvement and no need for a back-to-back bold rate cut, investors are now penciling in 25bps reductions at both this and the December gatherings.

That said, a 25bps reduction next week may not be a done deal as a Trump victory on Tuesday could convince more policymakers to agree with Atlanta Fed President Raphael Bostic who said a few weeks ago that he is totally comfortable with skipping a meeting. They could skip it next week or deliver the expected reduction in order not to catch investors off guard and hint at a December pause. After all, according to Fed funds futures, there is a 30% chance for a pause in December if a cut is delivered next week.

Taking into account the current market pricing, both cases argue for further gains in the US dollar. For the greenback to come under strong selling interest, Fed policymakers need to sound worrisome about the state of the US economy and signal that aggressive easing is needed for the months to come. Such a scenario seems unlikely though.

RBA and BoE also on next week’s agenda

The Fed gathering is not the only monetary policy decision on next week’s agenda. The ball will get rolling during the Asian session on Tuesday morning with the RBA, while on Thursday, ahead of the Fed, it will be the BoE’s turn to decide on interest rates.

RBA could remain on hold for a while longer

At their latest decision in September, officials kept interest rates untouched, noting that underlying remains too high and that their projections show that it will be some time before it is sustainably within the Bank’s target range. The Board noted that they will continue to rely on data and that they will do whatever is necessary to achieve price stability.

With the Melbourne Institute (MI) still suggesting that inflation will hover around 4.0% in 12 months, it is hard to envision an RBA policy strategy like other major central banks, which have already begun slashing rates. Indeed, market participants are penciling only a 20% chance of a 25bps reduction by the end of the year, while such a move is fully priced in for May.

So, investors will dig into the statement to see whether they are correct in predicting that this Bank will remain on hold for a while longer. If their views are confirmed, the may instantly gain some ground, but its latest downtrend against the almighty US dollar is unlikely to be reversed, at least not until investors get convinced that China will proceed with meaningful measures to shore up its economy.

A BoE rate cut seems increasingly likely

Passing the ball to the , at their September meeting, policymakers of this Bank decided to keep interest rates unchanged at 5.0%, noting that they will be careful about future rate cuts.

Nonetheless, a few weeks after the decision, BoE Governor Bailey said that they may need to be more active with rate cuts if the data continued to suggest progress in inflation, and indeed, the September numbers revealed that the slipped to 1.7% y/y from 2.2%, while the dropped to 3.2% y/y from 3.6%.

This prompted market participants to assign a strong 80% probability for a 25bps reduction at next week’s gathering, but the chances of this Bank following with another quarter-point reduction in December rest at around 30%.

Therefore, a rate cut on its own is unlikely to shake the pound much. The spotlight may fall on the voting and policymakers’ communication. If the votes reveal that the decision was a close call and the statement points again to no rush in further reductions, the pound could gain ground. The opposite may be true if it is agreed that more rate cuts are needed in the months to come.

New Zealand and Canadian jobs data

Elsewhere, the and employment reports are due to be released on Tuesday and Friday respectively. The is expected to proceed with a back-to-back 50bps reduction on November 27, with investors assigning a decent 15% chance for a bigger 75bps cut. The also cut rates by 50bps last week, but it is now seen slowing back to quarter-point reductions, with a 35% chance pointing to another double cut.

Having that in mind, weak jobs data from these nations could convince more market participants to bet on the bolder action for each of those two central banks.