Shutdown rolls on, while regional bank fears ease for now

European markets are following their Asian counterparts higher, with fears around the US-China trade spat abating for the time being. Despite recent rumours that the Chinese plan to hold out for as long as possible to put pressure on Trump, the US administration have already taken a notably softer tone that indicate an agreement in the coming weeks. Firstly, Trump decision to admit that the planned 100% tariff are “not sustainable” already undermines his threat, highlighting that he is desperate for a deal. Secondly, Trump has claimed that he wants Soybean purchases to resume and rare earth trade to flow, with the President essentially just aiming for the status quo rather than his previous insistence that the Chinese economy must fully open to US businesses. However, there is a confidence that the Chinese also want to work towards a solution after Scott Bessent noted relations with Beijing had “de-escalated” to the point that a meeting with Chinese Vice Premier He Lifeng was expected this week. For all the claims that geographical diversification will help protect investors from Trump-led volatility, European markets have seen plenty of volatility over the past week. The DAX lost almost 2% on Friday, but thankfully today’s optimism has helped lift the German bourse by 1% in early trade. Notably this has been headed up by a rise for the defence giant Rheinmetall, following the weekend air attacks by the IDF despite the supposed Gaza ceasefire plan in place.

Chinese data has dominated an otherwise quiet economic calendar, with growth falling short of the government’s 5% target although coming in slightly above estimates at 4.8%. The most encouraging release came in the form of the industrial production, which bumped up to a three-month high of 6.5% thanks to faster manufacturing production and mining activity. House price growth remains in negative territory, as has been the case for 27 consecutive months now. While government efforts to prop up the housing markets have helped lift the year-on-year price figure to the highest level since March 2024, the monthly decline of 0.4% signals that perhaps those efforts are losing traction. With GDP below 5%, and house prices losing traction, there is hope that we could soon see Chinese policymakers roll out fresh stimulus measures as they meet to discuss the latest five-year plan ahead of the December Politburo meeting and Central Economic Work Conference.

Looking ahead, the US remains a focal point as we watch to see how US-China relations develop to inform us on the pathway for assets such as gold and equities. Coming off the back of last week’s blockbuster surge in gold prices, there are plenty of calls for a short-term pullback if US-China relations start to improve. Nonetheless, with the US shutdown now looking like it could become the longest in US history, the narrative around US instability remains prevalent. Fortunately, this week will bring some degree of transparency amid a period of data darkness, as traders gear up for Friday’s CPI inflation release from the BLS. With the two-remaining rate cuts of 2025 largely priced in by markets, the volatility is likely to come from shifts in sentiment for next year. The CME currently has a January rate cut as the base case scenario (52%), and it is that opinion which is liable to shift once the inflation report comes out on Friday.

Friday’s losses also had a footing in fears around the financial sector, with regional banks taking a hit thanks to significant multimillion losses associated to with bad loans. Coming hot off the heels of the recent Tricolour and First Brands, the latest announcements from Zions Bancorp and Western Alliance will undoubtedly create a greater degree of sensitivity around future earnings reports for banks in the sector. As for today, markets may be willing to cast aside fears of a wider credit crisis brewing, but additional announcements of similar events could bring a fresh bout of volatility.