Last week’s US election has delivered some decisive moves in financial markets, much like the election outcome itself. Clarity over the Presidential result (Trump win), and legislative control of the Congress (for the Republicans) has been well received by the market, as evidenced by the strong run in US equities over the past week (the S&P500 has gained 3.5% since the polls closed on election day last week).
In currency markets, we have seen similar moves of conviction, most notably by the USD which has worked up a real head of steam over the last week. The reason being that Trump’s policies are a boon for the greenback from both a growth (e.g. tax cuts, deregulation) and potentially inflationary (e.g. high tariffs) front. A pro-growth agenda is all good and well, and that is what US equity markets have been reacting to in this post-election phase, but it does come with the risk that it might slow down the Fed’s pace of rate cuts in 2025. Which would be of benefit to the USD from a yield perspective and helps explain why the Dollar Index DXY) has gained a further 2.5% since election day.
US treasury yields have similarly reacted to the upside, with last week’s 25bp cut from the FOMC failing to have much impact on the bond market. Again, this move higher in short and long dated yields is a signal that the US central bank may not be able to cut rates as quickly as previously projected next year. The US 10-year treasury yield is sitting above 4.4%, which so far hasn’t rattled equity markets but if the uptrend continues to north of 4.6%, we could see some jitters from stock investors about what the bond market might be suggesting about the rates outlook.
The gold price has hit the skids courtesy of the advance in the USD and bond yields, with the precious metal now languishing, relatively speaking, around the $2600 level (as of Asian morning session trade on Wednesday). The appreciating dollar has effectively made gold more expensive to buy (for foreign investors) whilst rising yields have made bonds an enticing, alternative safe-haven asset. While the current wave of USD strength has slowed gold’s momentum, demand from central banks who are still wanting to create some separation from the Dollar in terms of foreign reserves (e.g. China, Russia) should underpin demand. So, there remains a pathway higher for gold back towards $2800 and beyond but this is likely dependant on a pullback from the USD.
Oil is another asset which is struggling against the weight of a rising USD (which makes oil more expensive to buy). Adding to oil’s woes are the underwhelming response by the market to Chinese stimulus and demand outlook downgrades by OPEC. Not to mention President-elect Trump’s plans to increase US oil production. Downside pressure may persist in the short-term for crude prices in the absence of supply concerns from the Middle East.
Looking ahead, US inflation figures will be a key point for investors this week. If US core CPI ticks higher again as it did last time around, we could see more doubt arise regarding whether the Fed does indeed cut rates again in December. As the election buzz starts to wear off, The Fed’s interest rate trajectory may again come into focus for investors. US CPI data may well be an important piece of the puzzle in determining what level the US benchmark interest rate end the year at.
