President Donald Trump, in office for less than a week, has already made waves with his economic policies and remarks, significantly impacting the financial markets. His controversial statements about the Federal Reserve, paired with the announcement of a 10% tariff on Chinese goods, have added to the market's volatility. Meanwhile, the Federal Reserve remains cautious, expressing the need for further evidence of economic weakness and subdued inflation before considering additional rate cuts. These developments have left investors navigating a dynamic and uncertain economic landscape.
President Trump's recent comments about the Federal Reserve have sparked debate. He expressed a desire for lower interest rates, a stance that has raised eyebrows given the Fed's independent status. Fed Chair Jerome Powell, whose term extends until late 2026, has signaled that further policy loosening would require clear signs of economic weakness and lower inflation rates. This cautious approach reflects the Fed's commitment to data-driven decision-making amidst political pressures.
In parallel, Trump announced a 10% tariff on Chinese goods, a significant reduction from the 60% rate he threatened pre-inauguration. This move aims to address trade imbalances but also introduces potential risks to global trade relations. The main Chinese CSI 300 index, along with the MSCI EM and Eurostoxx indices, have struggled since the onset of Trump's trade policies in October, underscoring the challenges faced by international markets.
Despite these uncertainties, Trump's low tax policies and light-touch regulations are designed to spur economic growth. His administration is also focused on expanding energy production in the US. Trump has already increased LNG exports to Europe and urged Saudi Arabia to lower oil prices. These initiatives could bolster domestic energy sectors and contribute to economic expansion.
The stock market's reaction to Trump's initial policies has been mixed. While many investors recognize that Trump's rhetoric does not always align with his actions, the resulting volatility has been palpable. The S&P 500 has seen a shift in its best-performing sectors over the past month, with oil and gas, financials, and industrials leading the way—marking a departure from chip stocks' dominance earlier in 2024.
Moreover, the percentage of S&P 500 stocks above their 200-day simple moving average (SMA) points to a potential challenge to tech's dominance this year. Currently, only 45% of Nasdaq stocks are above their 200-day SMA. This shift reflects evolving market dynamics and investor sentiment in response to new policies and economic indicators.
In the bond market, 10-year yields have retreated by 16 basis points since mid-January after reaching highs of 4.8%. This decline reflects growing caution among investors amidst fluctuating market conditions and changing economic forecasts.
Gold prices have also experienced upward momentum, clinging to daily gains above $2,770 and nearing their record high of $2,790 set in late October. These gains suggest that investors continue to seek safe-haven assets amidst ongoing economic uncertainty.
In Europe, upbeat preliminary January PMI data from Germany and the Eurozone showed an expansion in private sector business activity. This positive data provided support for the Euro, helping it gain ground ahead of US PMI reports. Similarly, better-than-expected UK PMI data helped Sterling gather strength as market focus shifted towards US macroeconomic releases.