Ceasefire gives hope, US data in focus before Thanksgiving

Even though Donald Trump’s tariff threats on China, Mexico and Canada didn’t concern Europe, the feeling in Europe was far from being comfortable yesterday. The word tariff gives cold chills especially to the European carmakers that already found themselves in crossfire with China. As such, Stellantis lost more than 5% yesterday while Volkswagen tanked another 2.76%.

Overall, Germany and Slovakia are the most vulnerable countries to any additional tariffs in Europe, because half of Germany’s GDP comes from exports, and cars make up to around 15% of these exports. Slovakia, on the other hand, has the highest per-capita car production globally, with automotive exports forming a significant part of its economy. The economic curse seems unrelenting for Germany. The country didn’t have time to get itself out of the energy crisis that the trade dispute is about to hit. Funny enough, you wouldn’t guess that the German economy is suffering badly when looking at the DAX valuations. The index trades near ATH levels, when the underlying economic fundamentals are telling a different story.

In the US, the market mood was better. Trump’s tariff threat, the rising inflation expectations as a result of them, and the cautious approach for further rate cuts from the latest Federal Reserve (Fed) minutes were outweighed by ceasefire news from the Middle East: Israel and Hezbollah inked a 60-day ceasefire agreement. The S&P500 posted its 52nd record high this year, the Dow Jones also extended its rally to a fresh record. Not everyone was happy, though. GM for example tanked 9% as its supply chain’s heavy reliance on both sides of its borders will explode the production costs and weigh on its profits.

Elsewhere, the energy companies had a slow session as crude oil consolidated and extended losses below the $70pb level on ceasefire news. Note that the news that OPEC+ is considering delaying the oil production restart beyond January has certainly tamed the selling pressure. Key nations at OPEC said that the timing may not be right for pushing 180’000 more barrels in an oversupplied market. The IEA for example predicts an oil surplus of more than 1mbpd next year – mainly due to the faltering Chinese demand. And that number risks being higher with Trump’s ‘drill baby drill’ policy. OPEC will meet at the start of next month and should drop plans to provide more oil in the next few months. And the latter should help throw a floor under the oil selloff, but will hardly reverse the medium-term negative outlook. Only a significant jump in demand, ideally from China, could do that. As such, US crude will likely consolidate below the 50-DMA.

In the FX, the US dollar eased yesterday as investors priced out a part of the geopolitical risks, while appetite in gold remained intact. The US 2-year yield extended a retreat, as the probability of a 25bp cut from the Fed jumped to 65% in the aftermath of the meeting minutes. Today, the US will release a crowded set of data before the Thanksgiving break. On the menu, the weekly jobless claims, the latest GDP update, durable goods orders and the core PCE index – the Fed’s favourite gauge of inflation. Quickly, the US economy is expected to have grown by around 2.8% in Q3 – slightly down from 3% printed previously but sales are expected to print a strong 3% growth (but we already knew that). Price pressures, however, are expected to have tamed in Q3 – which is good news for the Fed doves and the rate cut expectations. Yet, the core PCE index probably ticked higher to 2.8% in October, from 2.7% printed a month earlier. And that’s not great news for the inflation’s trajectory. Even less so as Trump’s tax cuts and tariffs are expected to give a boost to prices in the coming months. As such, a relatively strong growth number and softening price pressures last quarter will be welcome, but strong sales growth and a potential uptick in core PCE demand caution. I still believe that cutting first and seeing what happens is not the best strategy when the economic data remains strong. But I am not the Fed head. If the inflation data doesn’t surprise to the upside, investors will continue to back another 25bp cut in December and the latter could lead to a downside correction in the US dollar, and a rebound in major counterparts.

Elsewhere, the kiwi rallied against the greenback today following a widely expected 50bp cut from the Reserve Bank of New Zealand (RBNZ). Today’s cut marked the second consecutive 50bp cut, bringing total rate reductions to 125bp in just over three months, making the RBNZ the most aggressive rate cutter of the year. But the RBNZ predicted that the average cash rate falling to 3.83% by the middle of next year, suggesting that the policymakers, there, will move to a more gradual rate-cutting path moving forward. The latter could open the door for dipbuying opportunities after the kiwi dropped to the lowest levels in more than a year against the greenback. For those who are not willing to take the risk of a further dollar appreciation, shorting the euro against kiwi could be an alternative play provided the rising odds for more aggressive European Central Bank (ECB) cuts under Trump.