Rate cut optimism fuels the rebound rally

Markets

Stocks rallied on Wednesday, bouncing back from Tuesday's dip, which had interrupted a post-election winning streak. The trigger? Inflation data that landed right on target was a breath of fresh air for traders navigating the recent chaos of unpredictable economic indicators. The news brought a wave of optimism, especially as it nudged the odds for a December rate cut up to 80%, solidifying hopes for what some stock traders call the "ultimate holiday stocking stuffer."

With 34 days to go, futures traders are now assigning an 82% probability to a December rate cut, according to the Fed Watch tool—a scenario that beats receiving the dreaded lump of no rate-cut coal in the holiday stocking. The consumer price index met expectations, easing fears of a surprise uptick that might have thrown a wrench in the Fed’s easing plans. Even Fed hawks got in on the cheer, with Minneapolis Fed President Neel Kashkari expressing his confidence on TV that inflation is “headed in the right direction.”

As we head into the holiday season, markets take this inflation news as a strong signal of smoother sailing, hoping that December brings more rallies than retreats.

For those who’ve been through a Trump trade rodeo before, we know all too well that there’s a lot of potential for things to go sideways between now and the holidays. The markets may be riding high on optimism, but seasoned traders remember the whiplash that can come with policy surprises, unexpected tweets, and geopolitical curveballs. There’s a chance this rally could end in tears, with a Grinch-like twist to the holiday season, more so if UST 10-year yields crest 4.60 %+ rapidly. So, while the playbook might seem set, brace for volatility—this year’s market stocking stuffer may yet be a lump of coal as traders keep a watchful eye on those equity risk premiums ( ERP’s) that look set to flip upside down.

Forex markets

Meanwhile, the U.S. dollar defies its usual weakening trend on rising Fed cut probabilities. Instead, every dollar dip is seen as a buying opportunity. Why? A big part of the dollar trade has shifted from pure economic indicators to the new, heated geopolitical arena. With a Republican-controlled Congress now official, Trump has a smooth path for an aggressive policy without much pushback. His cabinet lineup—including the potential appointment of China hawks like Marco Rubio for Secretary of State—signals a hawkish stance, likely kickstarting his trade agenda with tariffs that may target China, Mexico, and Europe.

The sequence here is critical. Dollar bulls are fixated on what could be a meticulously planned playbook: first up, aggressive trade barriers and tariffs aimed at narrowing the U.S. trade deficits with heavyweights like China and Europe; then, rolling into a second act packed with pro-growth initiatives—think deregulation and corporate tax cuts. If Traders correctly read the higher UST 10-year yield and more hawkish Fed tea leaves for 2025, they may start booking the “Parity Party tickets to Europe“ in early Q1 2025.

With each turn in this unfolding saga, the markets are poised for a dollar surge—and Bitcoin’s in the mix, too, riding on the speculative wave. This layered approach in Trump’s economic strategy could set the stage for an electrifying phase in global finance, bringing a potent mix of policy-driven growth and heightened volatility across assets. Investors, meanwhile, are gearing up for what could be a blockbuster period of dollar and Bitcoin gains.

Oil markets

Oil traders are on edge as the International Energy Agency (IEA) prepares to release its latest monthly oil market report, anticipating a bearish outlook. This comes amid Iran's recent diplomatic overtures toward President-elect Donald Trump, opting not to retaliate against Israel—a prudent move given the incoming administration's assertive “take no prisoners geopolitical “ stance. Simultaneously, concerns persist over China's oil demand, with the economy facing challenges and the rapid adoption of electric vehicles (EVs) poised to disrupt the oil industry, much like Edison's light bulb snuffed out the light at the candle factory.

Gold markets

Gold is caught in the falling knife syndrome, with surging U.S. dollar strength and higher yields chilling the metal’s recent rally. Traditionally the ultimate “fear trade”, gold’s allure is waning as Trump hints at brokering peace in the Middle East and Eastern Europe, addressing the geopolitical fires fueling gold’s ascent.

In Asia, where gold buying thrives in local currencies like the Thai baht and Malaysian Ringgit( The Real Trade War Hedge). For many here, buying gold in local currency is a clever hedge, dodging dollar volatility while safeguarding investments.

Gold may be crashing against the US dollar, but strategic moves in local markets keep it far from the game.