Risk On after Trump Sweeps to White House

For the week ending 8 November 2024

As of midday Friday, global equities were substantially higher on the week as investors welcomed the prospect of pro-growth policies in a second Trump administration with the S&P 500 approaching 6,000. After a postelection rise to 4.5%, the yield on the US 10-year note settled back near last week’s closing level of around 4.30%. The price of a barrel of West Texas Intermediate Crude oil edged up $0.50 to $71.30. Volatility, as measured by futures contracts on the Cboe Volatility Index (VIX), declined sharply after the election, to 15.6 from 19.8 a week ago as risk sentiment improved.

MACRO NEWS

Stocks gain on apparent GOP sweep

Several equity indices, including the S&P 500, Nasdaq and Russell 2000®, posted records this week, with Republicans regaining the White House and potentially winning a majority in both houses of the US Congress. While Trump will return to the White House and the GOP will control Senate, slow vote counting in several western states means control of the House of Representatives has not yet been determined, though Republicans have the edge in most uncalled races. When the dust settles, Republicans will hold at least 53 seats (races in Arizona and Nevada remain too close to call) and perhaps as many as 55. A congressional clean sweep would give Republicans the ability to pass fiscal bills by a simple majority using so-called budget reconciliation, the same tool Democrats used with great effect in the first half of President Joe Biden’s term. Other legislation requires a three-fifths supermajority.

Stocks have largely welcomed Trump’s pro-growth, low tax, deregulatory agenda. The tax cuts implemented early in his first term will likely be extended next year, but the prospect of new trade barriers is a cause of uncertainty near term. Small-cap equities are seen as beneficiaries of Trump’s likely policy mix since they tend to be more domestically focused and benefit from lower corporate tax rates and a lighter regulatory touch. US Treasury yields firmed as the election outcome became clear, with the 10-year note approaching 4.50% the day after the vote before easing later in the week. The US dollar rallied, particularly against emerging market currencies, though those losses moderated later in the week. Bitcoin hit a record. From a corporate finance perspective, a second Trump administration is expected to set off a wave of mergers and acquisitions and initial public offerings.

Late Thursday, Trump’s advisors said that the US will renew the maximum pressure campaign it maintained toward Iran during his first term, increasing sanctions and curbing oil sales to undercut the country’s support of its proxies in the Mideast along with its nuclear program.

Fed plays second fiddle

It’s rare that a rate cut by the US Federal Reserve isn’t the lead story, but this week, Fed news has taken a back seat to the election outcome. The quarter-point rate cut in the funds rate Thursday, to a range between 4.50% and 4.75%, was fully priced in by investors, and what little suspense accompanying the meeting was focused on how Chair Jerome Powell would address stronger-than-expected economic growth. Such growth could complicate the central bank’s job of bringing inflation durably down to its 2% target. Economic data have been stronger than expected, Powell acknowledged and said the labor market is continuing to cool very gradually. Powell was asked about the potential impacts of President-elect Trump’s policy proposals. He said the FOMC doesn’t speculate on potential changes in fiscal policy and that the election will have no effect on monetary policy. The Fed, the chair said, is just beginning to think about adjusting the pace of rate cuts and said it is in no hurry to get to a neutral policy stance. Ahead of the FOMC meeting Thursday, CNN reported that Trump is likely to allow Powell to serve out the remainder of his terms as Fed chair, which expires in May 2026. At Thursday’s press conference, Powell said he would not step down as Fed chair if asked by Trump.

China’s NPC approves debt swap

The Standing Committee of the National People’s Congress, China’s top legislative body, approved a ¥10 trillion ($1.6 trillion) debt swap that will free up fiscal firepower for local governments in the near term. However, investors were disappointed that the NPC didn’t announce measures designed to boost domestic demand. There is speculation that the government wants to keep some fiscal powder dry to allow it to react to the incoming US administration’s trade policies early next year. Tax policies intended to support the property sector will launch soon, the government announced.

WSJ: Russia targeted US-bound planes

Russia is suspected of plotting to send incendiary devices on planes bound for the US and Canada, the Wall Street Journal reported on Monday. Western security officials say they believe that two incendiary devices, shipped via DHL, were part of a covert Russian operation that aimed to start fires aboard cargo or passenger aircraft flying to the US and Canada. The devices ignited at DHL facilities in Birmingham, England and Leipzig, Germany before they could be loaded on to planes bound for North America.

QUICK HITS

The Institute for Supply Management’s nonmanufacturing index rose to 56.0 in October, its strongest reading since July 2022. The measure stood at 54.9 in September. The employment subindex rose to 53.0 last month from 48.1 in September, helping alleviate concerns raised by soft October nonfarm payroll data. 

S&P Global’s services PMI for the United Kingdom fell to 52.0 in October from 52.4 in September while the composite index fell to 51.8 from 52.6. In the eurozone, the services PMI edged up to 51.6 from 51.4, and the composite went up to 50.0 from 49.6. In Japan, the service index slumped to 49.7 from 53.1, dragging the composite index down to 49.6 from 52.0.

The Bank of England lowered its base rate 0.25% to 4.75% on Thursday. Markets don’t expect another cut until February. Also on Thursday, Sweden’s Riksbank cut its repo rate 50 basis points to 2.75%, the first cut of that size in a decade.

Germany’s coalition government collapsed on Wednesday after Chancellor Olaf Scholz sacked finance minister Christian Lindner of the pro-business Free Democratic Party. Scholz said Friday he is ready to discuss the timing of a snap election. The eurozone’s largest economy thus faces a power vacuum in the face of probable US tariffs on European goods during the new US administration.

China’s premier, Li Qiang, said China has ample room for fiscal and monetary policy adjustments.

Boeing’s machinists accepted a new union contract, ending a weeks-long strike.

Citing a lack of mutual trust, Israeli Prime Minister Benjamin Netanyahu announced he has fired Defense Minister Yoav Gallant, a longtime rival within his Likud Party. He will be replaced by Foreign Minister Israel Katz. Minister Without Portfolio Gideon Sa’ar will replace Katz as foreign minister.

A preliminary reading of Q3 US nonfarm productivity rose to 2.2% from a downwardly revised 2.1% in Q2. Unit labor costs rose at an annualized rate of 1.9%, down from 2.4% the prior quarter. Economists had expected a 1% rise in ULC.

The People’s Bank of China allowed the yuan to weaken after the US election, a sign the central bank is allowing depreciation under the threat of trade tensions with the US under a Trump presidency. Trump has threatened China with 60% tariffs.

Japanese workers’ base salaries saw the largest increase in over three decades, supporting the Bank of Japan’s view that the economy remains on the recovery track and backing the case for a rate hike in coming months. The pace of gains in base pay quickened to 2.6% year on year in September compared with a 2.4% pace in August. The rise was the largest in over 31 years.

Canada’s unemployment rate held steady in October at 6.5%. The economy added 14,500 jobs last month, about half what economists had expected.

THE WEEK AHEAD

Tuesday: UK unemployment, Fed’s Senior Loan Officers Opinion Survey

Wednesday: US CPI

Thursday: Eurozone GDP, US PPI

Friday: Japan GDP and industrial production, UK industrial production and GDP, US retail sales