This weekly newsletter pulls together summaries of the top ten most-read Insights across Macro and Cross Asset Strategy on Smartkarma.
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1. Steno Signals #125: EUR Liquidity Overtakes USD Liquidity – A Historic Shift
- Happy Sunday from Copenhagen.
- Bear with me this week through this long read as we approach an extremely interesting crossroads in sovereign bond markets, impacted by very tight liquidity.
- This story has been somewhat masked by policy events in the US and Germany, but it may nonetheless be the most important narrative for Q4, which is why you need to pay attention to it.
2. New Tariffs and China: THE BARK IS WORSE THAN THE BITE
- Trump’s approach to China will be more transactional based on trade and technology.
- China’s dependence on the US for its exports has declined over the last 6 years. ASEAN and other emerging markets are the engines for China’s export growth.
- The average tariff on China’s exports to the US will increase from its current level of 20% but may be tempered by a reciprocal import agreement with the US.
3. Flash Macro Watch: The Fed has abandoned its 2% target
- Following another reasonably hot U.S. CPI report yesterday, it’s time to dust off the old sell-side charlatan chart comparing today’s inflation to the 1970s.
- Honestly, I find this comparison absurd in many ways, as the drivers of inflation are different now.
- Still, there is an interesting resemblance, which got me thinking…Inflation in the U.S. is trending around 3-3.5%, and the Fed has made no progress over the past 3-4 months toward the 2% target.
4. US Politics: Promises, Promises
- Donald Trump has consistently advocated for the use of tariffs to address what he perceives as ‘unfair’ trade practices causing US trade deficits.
- His stance, whether used as a bargaining chip or not, is based on a Hobbesian view.
- This viewpoint poses a significant threat to the global economy.
5. Second Trump Presidency: Growth Focus Will Support Equities, but Challenge the Fed
- The decisive outcome of the US presidential election has significantly reduced the uncertainty facing financial markets due to their familiarity with President-elect Trump’s policies during his first term.
- President-Elect Trump has a complex past relationship with the Fed. There are fears that pressure will be exerted on the Fed to boost growth at the cost of higher inflation.
- US fiscal policy conduct will be closely monitored by the Treasury market which is discounting fewer policy rate reductions by the Fed in 2025. Fed policy conduct will remain data-dependent.
6. How to Trade the Trump Euphoria Rally
- We expect the stock market to rally into January, driven by corporate tax cut expectations, FOMO performance chasing and buybacks as the post-earnings season window re-opens.
- Expect stock prices to consolidate or pull back just before Inauguration Day.
- That’s when many of the unknowns of the Trump Administration’s initiatives will be better defined.
7. The Drill: A Look at Trump’s Policy and Their Impacts
- Before we get to Trump, we need to quickly discuss OPEC and their recent cut in demand forecasts.
- This reduction hints at an unwillingness to increase production in the near future.
- Saudi Arabia is key here, as it holds the largest excess capacity, and a production hike from them could swing the market and send prices below $50 USD in the blink of an eye.
8. Asia Geopolitics: Dealing with a More Trumpian World
- Asia Pacific economies benefit from a global order which preserves their sovereignty and allows them to prosper. Trump’s return puts some of these benefits at risk.
- Washington under Trump will continue to pursue its rivalry with Beijing, but Trump’s responses to crises in Ukraine and the Middle East could leave instability in its wake. =
- Washington’s allies in Asia will start “Trump-proofing” their defence strategies. Countries will hedge between the US and China while ramping up military spending.
9. Steno Signals #126: Disentangling the ECB Schnabel Speech – How Will QT Develop from Here?
- We’re at a critical juncture in sovereign bond markets, with liquidity running razor-thin and the game changing fast.
- German Bunds, traditionally rock-solid, are now trading through swaps and nearing zero on cross-currency swaps (ESTRON/SOFR) – a first in modern market history.
- The takeaway? Major central banks, especially the ECB, are pressing too hard on QT, and the markets are about to hit back hard if they don’t ease up soon.
10. Overview #12 – Not Another Trump Trade!Time to Fade?
- A review of recent events/data impacting our investment themes or outlook
- In the markets we follow, China, Gold and the JPY most impacted
- Which ones should we fade and where has the trend changed?
