
When Donald Trump boarded the Air Force One exactly four years ago to leave DC, many thought it would be his last time. Two weeks before that, Republican voters had stormed into the Capitol in an attempt to overturn the election result, a shocking attack on US democracy, which many believe, if not orchestrated, it was tolerated by Trump. During those dark days, the Senate Republican Leader, Mr. McConnell called him a "despicable human being", while Rupert Murdoch (Fox News owner and one of Trump's biggest supporters) wrote in an internal email that he vows to make him a "non-person". Four years later and after several lawsuits and a felony conviction for paying off a woman for her silence, Trump is the POTUS again. What a comeback this has been and only the second time in history that this has happened, the first being in late 1880s (Grover Cleveland).
And here we are, facing the second and final chapter of a Trump presidency. Hours of analysis and thousands of pages have been devoted to forecasting what his second term will look like. On one extreme, there are views that the US is going to morph into a plutocratic oligarchy. It is a (sad) fact that US tycoons are now "in bed" with the President of the USA and the real issue is that these ridiculously wealthy people also control massive flows of information through their social media and other Technology platforms. This dangerous relationship has damaged democracy in other parts of the world, already. Thankfully, there are still checks and balances in the US to avoid slipping into an oligarchic state. But just days before his inauguration Trump held a private meeting with Senate Republicans and allegedly told them that he wouldn’t wait on them to start implementing his biggest policy priorities (immigration/tariffs). He also told lawmakers that he has already drafted 100 executive orders, and that he would press the limits of his presidential authority to go it alone on those issues. The signs are not great, to say the least.
The most likely scenario is for President Trump to "water down" most of his controversial campaign promises. He is someone who looks very closely to how the stock market reacts and behaves, and if the last 60 days have taught him anything is that implementing all his "threats" and "promises" all at once will not bode well with investors, let alone with the FED. As a reminder, the three pillars of his new presidency, as outlined during the campaign, are : deregulation, mass deportation and tariffs to all imported goods. Oh, and ending the Ukraine war "in one day". Starting with the latter, he already said that "a six month period is more realistic". And several other "U-turns" is what we would expect with the rest of his top priority agenda: some form of implementation of the promises but in a way that pleases the markets. Turning to tariffs for example, the plan for 10-20% level on all European imported goods and 60% on China already looks to have been abandoned. Instead there are scenarios for either implementing 10-20% on critical imports or implementing a very small initial tariff on all goods which could increase periodically if the counterparty does not fulfill certain wishes and requirements. This is a rather benign scenario for financial markets.
Equities had a milestone week , with 3-4% gains on average for the European and US markets. For the US, it was the best week since Trump's election and for Europe some new record highs were set (EuroStoxx50, UK FTSE 100, German DAX). On a year-to-date basis, Europe continues to outperform the US, much like the first quarter of last year. The superb results of Cartier-owner, Richemont, drove investors back to the luxury trade, although it would be premature to give the sector the "all clear" again. We would prefer to stay on the sidelines. In terms of sectors, Energy continues to be on top of the list, on both sides of the Atlantic and US mega caps continued to underperform. Equally interesting is the fact that Staples, the most defensive part of the equity market is still negative for the year, in continuation of the dismal performance of last year. Valuations are becoming ridiculous.
The US December inflation report had positive surprises. Although the headline CPI increased by 2.9% vs consensus of 2.8%, the core CPI fell to 3.2% vs consensus 3.3%. Even more importantly, the rise in headline inflation was due to Energy, which contributed the about 40% of the increase. The biggest (positive) surprise was in OER (owners’ equivalent rent), which increased "just" 31bp, lower than the 39bp expected, in another sign that the trend in OER has stepped down since last year. Core goods prices also came in below expectations with only a 5bp increase as nearly every category saw price declines. Overall this was report provided some relief.
Bonds moved (at last) higher, after the inflation numbers in the US. Some comments by FED officials about the need for rate cuts during the first half of the year also helped sentiment. We had flagged the extreme short positioning of hedge funds, which led to a significant drop of the yields when the market started to turn (due to short covering). The US 10year finished the week almost 20bp lower at 4.60% and the German equivalent about 10bp lower at 2.53%.
It is important to note that global inflation is clearly falling, at a time when there are still questions about the US. The run rates for headline, core and consumer goods' prices has nearly fully returned to pre-pandemic levels, but we all acknowledge that progress on services inflation has been slow. Looking at the last few months of US inflation releases, one could be forgiven for thinking that this stickiness in services has persisted. However, perhaps that is not really the case: according to UBS's tracking of 3-month annualized inflation rates for 47 countries (26 Developed Markets and 21 Emerging Markets) through November shows very significant progress on that front as well. Most notably, the pace of core services (ex-housing) inflation has plummeted and is now essentially back at pre-pandemic levels. Of course, this pace now needs to be sustained for 12 months to fully show up in YoY inflation rates, but the trend is very encouraging.
The minutes of the December ECB meeting showed willingness for more rate cuts. But at the same time, they noted that a cautious approach is still warranted in "view of the prevailing uncertainties and the existence of a number of factors that could hamper a rapid decline in inflation to target". Interestingly, some members at the meeting noted a case could be made for a 50bp cut. All in all, the minutes confirmed the view that the recent surge in bond yields is not based on any solid foundation and it is more a flow driven/technical move, which should be faded. Or in other words, buying EUR bonds at current levels looks like a very attractive choice.
US December Retail Sales rose 0.4% a little below consensus expectations (0.6%). The figure is boosted by sales of motor vehicles (+0.7%) and a strong rise of 1.5% for gasoline. When both these components are stripped out, retail sales rose just 0.3% over the month. On a year-to-year basis the growth was 3.9%, which means that if we take into account that inflation is about 3%, the real growth was about 1%. Although this in not alarming, it shows a rather weak consumer spending in real terms and which is based on ever growing credit card balances.
Chart of the Week : The USD's fortunes under Trump is anybody's guess.

The above chart shows the EURUSD price for the first term of President Trump (end of 2016 to end of 2020). Contrary to market wisdom, the USD fell precipitously right after Trump was inaugurated and the EURUSD reached the high of 1.25 from the low of 1.05, by mid-2018. What followed was another two years of strong dollar which brought the EURUSD back to where it started and when the pandemic spread, the dollar again sold-off for EURUSD to reach almost the same high. What will happen now is really a coin toss, but in principle Trump is in favor of a weak dollar. He has even floated in the past the idea of a sudden devaluation of the American currency, as a means to make imported goods very expensive and which play the same role as tariffs. At the same time his trusted US Treasury nominee is in favor of a strong dollar and of course the EUR-USD yield differential as well as the forecasted growth of the two regions point to a stronger dollar ahead. It will be a volatile year ahead for the currency as well as for other financial assets.
Disclaimer
• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.
• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.
• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.
• This document is strictly confidential and should not be distributed further without the explicit consent of Kendra Securities House SA.
• Sources: Chart of the Week : KSH/FactSet
Comments