Morning Market Update: ‘Trump Trades’ Take a Breather Ahead of Key U.S. CPI Release

Global market instability threat is on the rise, closely watched, and specifically against the conditions occurring on the European continent.

Over the past few days, growing concerns surrounding the contagion effects experienced after Silicon Valley Bank’s collapse and jitters over Credit Suisse’s instability pushed risk measures to multi-month highs.

Interpretation of investor sentiment against those risks could be derived in Frankfurt, the German DAX index.

“The “Trump Trades”: What They Are and How the Market Responds” 

U.S. President Donald Trump, market players had deeply invested in “Trump trades” a mix of fiscal spending, lower taxes, and higher tariffs that promised economic growth.

This had initially driven the dollar higher and Treasury yields up but has now stalled and become hostage to mainstays of key data releases from the U.S.

Consumer price index data is important in the push as it may influence the expectation of the interest rate and thus the results of the market.

After the win of Trump, expectations of a rate cut by the Federal Reserve decrease. The only 62% probability of a rate reduction in December dropped from 77% a week ago.

Other economic indicators, like data on U.S. producer inflation and retail sales, will also shape the expectations of investors going forward in the days ahead.

“Jay Powell, the Fed chair, stressed a cautious, patient stance for monetary loosening in light of the reality that the Fed would not try to pre-empt the policies that Trump may implement.”

The Contradictions of Trump Trades

Excitement over the policies of Trump also brings contradictions. For instance, inflation shoots up and the government increases its spending. In general, this bodes well for gold since it is largely seen as a hedge against inflation.

A strengthening dollar, on the other hand, has capped the upside of gold but doused its recent gains.

The dollar rises to a one-year high versus the euro and reaches within spitting distance of its multi-month high versus the yen with higher yields from the United States.

While higher borrowing costs aren’t yet impacting equity markets, they are weighing on it now, especially in the tech sector, because these sectors are more sensitive to interest rate fluctuations.

Kyle Rodda, “higher risk-free rates” can eventually hurt valuations and force growth stocks down. Recently, an index downturn was recorded during the major Asian indices.

For instance, Japan’s Nikkei, South Korea’s Kospi, and Australia’s share index fell by about 1%. Hong Kong’s Hang Seng index lost 0.6%, with even bigger pullbacks earlier in the day.

Weakness in European and U.S. Markets

Wall Street futures see this as another session for the sell-off saga to unfold. More pessimistically, pan-European STOXX 50 futures also trade in the red.

The corporate scene in Europe is relatively quiet, with financial super-giants ABN Amro and Allianz report earnings.

There is also a speech from Catherine Mann, Bank of England’s economist, whereby the gilt-edged talking point would be the recent sterling sell-off – this happened as sterling weakened quite strongly on Tuesday. 

Meanwhile, Fed officials from various regional banks would speak on different events related to the U.S. This might feed into market psychology once again.

Challenges and Prospects of Central Banks

Expect the Bank of England and the Federal Reserve to continue to be kept on their toes by the turbulence in the market as they try to manage expectations.

Notable expectations are also for indications from the Fed on balancing monetary policy with expansive fiscal plans by President-elect Donald Trump.

In a recent speech, Powell assured the market that the Fed would go cautiously, meanwhile focusing on economic fundamentals instead of politicking over the changing political landscape.

Data releases on inflation will be central to central banks in their navigation through this uncertain environment.

Conclusion

Increasing market risks at the moment owing to the implosion of Silicon Valley Bank and problems at Credit Suisse are straining global markets, particularly in Europe.

While “Trump trades” initially had the effect of pushing US yields and the dollar higher, focus now returns to economic fundamentals now as CPI data, inflation figures, and comments from the monetary authorities dominate the next few days.

While market participants continue to struggle with moving higher risk-free rates to equities, consensus on the direction that global markets will take remains uncertain- and caution wins the day.