Fed Chair Jerome Powell delivered a dose of “unvarnished truth”

Markets

The post-election rally hit a brick wall overnight after Fed Chair Jerome Powell delivered a dose of "unvarnished truth," hinting that economic strength might warrant patience on future rate cuts. This was a cold splash of reality for equity traders, who were already loaded up to an 11-year high in U.S. stocks post-Trump victory. A quick sell-off followed, turning the market's green glow into a sea of red as traders scrambled.

After this week’s CPI numbers, markets were banking on an 80% shot at a December rate cut. But with Powell’s cautious tone, those odds plunged back to a 58% toss-up, leaving traders feeling the hangover of a post-election rally frenzy.

And here’s where the “Trump trade” comes roaring back. With tariffs likely to lead Trump’s policy charge, inflation expectations are climbing, which pushes Treasury yields even higher. Tariffs act as a sneaky back-door tax on imports, driving up costs across the board. This doesn’t just mean higher prices; it means inflationary pressure and higher yields that could turn the dollar into a runaway train. Equity risk premiums are now under the spotlight, nudging jittery investors toward that index sell button.

Other countries may counter U.S. tariffs with targeted retaliations, likely hitting Trump-favored industries in export-heavy “ Red” states, such as soybean farming. During Trump's first term, we saw how China’s tariffs on U.S. agricultural products directly impacted American farmers, especially in states where support for Trump runs deep. This time, as trade tensions potentially escalate, nations may again zero in on strategic sectors to maximize economic and political pressure on the U.S.

If the stage is set for a renewed tit-for-tat exchange, we could see a prolonged back-and-forth—each move prompting a sharper counter-response. This could go a long way down a costly path, with ripple effects hitting a broad swath of industries and global markets alike.

In emerging markets, the scene is set for some real pain. Asia, particularly those markets tied closely to China, is bracing for the fallout. If Trump’s policy moves hit harder and faster than expected, we’re looking at a potential seismic shake-up across Asian markets. The implications could reverberate globally as currencies and equities feel the tariff hammer.

As emerging markets brace for impact, the unintended collateral damage could be brutal, from Turkey to South Africa and back to Indonesia.

Forex markets (Yuan watch)

FX traders remain firmly focused on "Yuan Watch."

The dollar held strong overnight, pulling USD/JPY back into 156’s, while USDCNH stayed steady around 7.2550, reflecting a market still navigating post-Powell clarity and trade tensions. Beijing’s approach since the election has largely been one of “ smoothing” the Yuan as it eases against the dollar. However, this recent slide in the Yuan merely balances out broader dollar strength, with the trade-weighted CFETS basket for the RMB remaining stable. Despite the chatter about a possible RMB devaluation to counter trade war effects, Beijing shows no signs of pulling that trigger; any such move would likely require more pronounced trade war turbulence to materialize.

FX traders are in a holding pattern, their eyes fixed on Beijing’s next stimulus move. China’s policy crossroads is unmistakable: let the yuan slip to boost exports, or go all-in on demand-side stimulus to fuel growth—a Herculean task in today’s economic climate. The most likely outcome? A finely-tuned mix, enough stimulus to keep dollar bulls at bay, while the PBoC holds the yuan steady in the 7.35-7.45 range. This approach gives China room to maneuver while keeping markets on edge. But for seasoned FX players, the real thrill is in the tail risk—a sudden, dramatic yuan shift that would signal Beijing’s hand and could send shockwaves through global currency market

Oil markets

Meanwhile, oil has been eerily quiet—a classic sign that big moves may be on the horizon. Though prices ticked up slightly on steady U.S. gasoline demand, they’re still on track for a weekly loss. And the IEA’s latest forecast paints a bearish picture, warning of a looming oil glut in 2025, with global crude supplies expected to overshoot demand by over a million barrels a day. And Trump’s clout over Big Oil could mean U.S. production hits fresh highs under his watch—a badge of honour he’s eager to pin to his lapel.

Adding even more intrigue is Trump’s potential Middle East play. Reports hint that Trump might be eyeing a peace deal ribbon-cutting on the Lebanon-Isreal border. Israel’s recent diplomatic moves suggest a peace deal understanding with Trump, raising the possibility that he might add “Middle East peacemaker” to his list of ambitions—a feather he desperately wants to adorn his geopolitical cap.

In short, buckle up. With inflation, trade wars, a turbocharged dollar, and geopolitical curveballs all in play, the Trump policy machine is shaping up to be a volatile ride that’s got markets jittering with excitement—and fear.

Gold markets

Gold prices have found some footing after a recent tumble, but they’re struggling to break higher, leaving traders hoping for that $3,000/oz level feeling tentatively bruised. Hopes for a fast-paced Fed rate-cut cycle have dimmed as bond markets catch on to the "Trump Trade" momentum, with aggressive rate cuts now looking unlikely. Yet, it’s not a knockout for gold—this ebb and flow has always been part of the metal’s rhythm.

In the East, gold isn’t just an investment; it’s an integral part of the cultural and financial landscape. Unlike the West, where the financial system has gradually nudged out physical holdings, many in the East prefer tangible assets like gold. This difference in mindset creates a balancing act: while Western markets buy up gold when fear spikes and sell when confidence returns, Eastern demand steps in to smooth volatility, buying on dips and stabilizing price swings.

Right now, the drop in gold’s dollar price presents intriguing opportunities, particularly for investors in regions facing currency risks. With projections that the Thai Baht could hit 36 and the Yuan to 7.60 versus the dollar as Trump’s tariff agenda unfolds, gold offers an appealing hedge against local currency devaluation. And with $2,500 as a major technical level, traditional bulls may soon jump back in, signalling a potential pivot for gold and an opportune moment for investors seeking shelter from currency volatility.