Primed for the fabled 'Santa melt up'

Markets

The S&P 500 soared to a fresh intraday peak on Monday, igniting December's trading with a spark after riding the wave of November's blistering rally.

On the economic front, investors sifted through a slew of new data. The Institute for Supply Management's manufacturing index signalled ongoing softness in factory demand, yet the numbers slightly surpassed Wall Street predictions.

"It could have been a darker day."

This sentiment effectively summarizes Monday's report on the crucial U.S. manufacturing index. Thus, this nuanced optimism reflects the overall feeling regarding the latest assessment of U.S. manufacturing strength. Without question, the uncertainty surrounding tariffs makes planning a challenging endeavour for virtually all U.S. manufacturers.

Market players are now steeling themselves for potential turbulence as the Labor Department gears up to release crucial November jobs data later this week. This upcoming report, the final one before the Fed's next rate decision, could introduce volatility exacerbated by bounce-back effects from hurricanes and strikes-related noise. Hence, the figures might present a complex puzzle complicated further by market algorithms that amplify noise in response.

Yet, despite global tariff dread, political upheaval in Europe and domestic economic data uncertainties, the U.S. market seems primed for the fabled 'Santa Melt Up,' with no mystical ingredients needed. U.S. Treasury yields, which took a surprising dive over the past week, confounding numerous post-election trades, are now markedly subdued. This calm is primarily attributed to Scott Bessent's safe hands grip on the helm of the U.S. Treasury. Concurrently, the recent decline in oil prices is helping to temper inflation expectations, adding another layer of stability to the economic landscape.

Amidst this backdrop, currency markets are buzzing, catalyzed by Donald Trump’s latest pronouncement. Over the weekend, the President-elect threatened to slap a punishing 100% tariff on any nation daring to dethrone the dollar from its global reserve currency pedestal, sparking a rally in the U.S. dollar as traders navigated the implications of such a bold geopolitical maneuver.

Forex markets

The dollar soared into December, riding a bullish wave as President-elect Trump staunchly defended its position as the global reserve currency. Amidst this backdrop, the euro faltered, shaken by escalating political turmoil in France, while the yuan edged lower, bracing for anticipated monetary easing in China.

As the U.S. dollar rebounded robustly from the Thanksgiving lull, the greenback recaptured its swagger, overturning its previous week's month-end rebalancing-related subdued performance. This resurgence was partly ignited by Trump’s stern warning to the BRICS nations in a fiery social media post, threatening them with a hefty 100% tariff should they dare to challenge the dollar's supremacy in global trade with a new currency.

This audacious trade threat, while ostensibly symbolic, resonated powerfully across financial markets, which had been bracing for a Trump administration potentially inclined towards diluting the dollar’s strength. Despite the nuances between reserve status and exchange rate values, Trump's comments reinforced the dollar's dominance.

French Prime Minister Michel Barnier is on the brink of a political crisis, facing a no-confidence vote that could dismantle his government and ripple through the eurozone. Barnier took a bold step on Monday, employing a rarely activated constitutional tool to force through the divisive 2025 budget, citing the need for "stability" amid escalating political discord.

This provocative maneuver quickly sparked a fierce backlash from both ends of the political spectrum. Marine Le Pen’s far-right National Rally and the leftist New Popular Front immediately filed no-confidence motions, precipitating a possible critical vote for Wednesday that could end Barnier's tenure.

This imminent political showdown emerges amid a fragmented National Assembly still reeling from June’s snap elections, which left it without a definitive majority, setting the stage for a turbulent week in French politics.

In the Asia FX markets, speculation is swirling that China might counter any new tariff hikes from the incoming Trump administration by strategically devaluing the yuan. This move would partially cushion the blow to its exports to the United States. However, tensions are already escalating, with further U.S. restrictions on U.S.-China trade set to take effect on Monday. This latest round, marking the third crackdown in as many years on China's semiconductor industry, targets exports to 140 companies.