Muzinich Weekly Market Comment: An early assessment of Trump 2.0

December 2, 2024

If you have any feedback on this article or are interested in subscribing to our content, please contact us at opinions@muzinich.com or fill out the form on the right hand side of this page.

--------

In our latest roundup of the key developments in financial markets and economies, we assess how financial markets reacted to Donald Trump’s US election victory in November.

Just over three weeks since Donald Trump secured a one-sided victory over Democrat rival Kamala Harris in the US presidential election, it seems an opportune moment to assess how financial markets have responded.

Starting with US Treasuries, the yield curve has bull flattened, with yields at the longer end falling more than those at the front end. This is typically observed when markets perceive the central bank as being likely to hold short-term rates steady in the near term while cutting over the longer term.

While markets still expect the Federal Reserve to cut rates, they have significantly revised their expectations for the neutral policy rate higher, factoring in Trump 2.0’s policy agenda. Overnight two-year forward policy rates are now priced at 3.66%, up sharply from a low of 2.40% in September.^[1]

For pessimists and perma-bears, this pattern in yield curves signals a potential tail-risk event. They would argue such movements often precede significant market stress, as investors seek a "flight to quality" by increasing their exposure to long-dated government bonds to hedge risk.

European weakness

In Europe, the government bond yield curve has seen both short- and long-term bond yields falling by similar magnitudes. This pattern typically occurs when investors expect central banks to lower interest rates more aggressively, reflecting weaker economic conditions.

Economic surprise indices for the Eurozone turned negative this month, indicating activity is slower than anticipated.^[2] Meanwhile, the policy agenda of Trump 2.0 is not expected to be internationally friendly, adding to the uncertainty. European Central Bank (ECB) Governing Council member François Villeroy de Galhau stated last week the ECB "may need rates at stimulative levels".^[3] Overnight two-year forward policy rates are now priced at 1.84%, down from 2.78% in June.

Euro sceptics point out that, while yields fell across Eurozone government bond curves, French debt significantly underperformed its Eurozone peers, mostly likely the result of continued political uncertainty and concerns over its fiscal trajectory. By way of context, Greece can now fund 10-year liabilities at the same cost as France, suggesting investors may be bracing themselves for another sovereign debt crisis in the region.

The bond market outlier was Japan, where the yield curve bear steepened, with short-term yields rising more sharply than long-dated yields. This is common when the market expects an increase in policy rates. The likely catalyst is Japanese inflation, with consumer prices excluding fresh food rising by 2.3% in October, exceeding the consensus estimate of 2.2%.^[4] Inflation remains above the Bank of Japan’s target and strengthens the case for bringing the next policy hike forward from January to December.

Risk assets

Corporate bonds had a solid November, with positive total returns across the board. In high yield, US credit was the standout, supported by Trump’s likely agenda of deregulation and tax cuts. In investment grade, European credit outperformed, benefiting from the strength of government bonds. Meanwhile, emerging-market credit underperformed in both high-yield and investment-grade categories. EM credit tends to perform best in a risk-on environment paired with a lower-rate regime.

Commodities had a mixed month, with supply/demand dynamics and market positioning outweighing the influence of Trump 2.0. Oil prices remained largely unchanged, while gold and silver prices declined. The big winner was Bitcoin, which surged over 40% on expectations of deregulation to reach a market capitalization of $1.9 trillion^[5] – larger than the equity markets of Spain and Italy combined.

Meanwhile, our preferred measures of equity and bond market volatility, the VIX and MOVE indices, closed November below their one-year averages, signalling a relatively calm market environment.

Stocks had a good month, with the Bloomberg World Large & Mid Cap Price Return Index posting a gain of over 3%. However, performance was not uniform, as US equity markets significantly outperformed the rest of the world. The Dow Jones Industrial Average rose more than 7%, compared to a 1.5% decline in the Bloomberg Eurozone 50 Index, while the Shanghai Stock Exchange Composite Index closed the month up 1.5%.

The real story

The US dollar appreciated, but the euro's weakness emerged as the bigger story, even underperforming the Brazilian real, which hit an all-time low of 6.01 against the dollar in November (see Chart of the week).

The catalyst for the weak Brazilian real was investor disappointment over fiscal responsibility. Finance Minister Fernando Haddad unveiled a long-awaited plan to cut 70 billion reais (US$11.65 billion) from public spending through 2026.^[6] However, the plan also included a proposal from President Lula to exempt wages of up to 5,000 reais per month from income tax, which sparked pessimism about the fiscal impact of the otherwise austere package.

In recent times, Brazil has been a strong leading indicator of global inflation and hiking interest rates early and aggressively. Developed-market governments should perhaps take note of investors' lack of tolerance for fiscal slippage, as evidenced by the underperformance of Brazilian assets.

A final word on Trump 2.0

With feverish expectations over what Trump will do when he takes office for a second time in January, it is worth noting his administration will inherit a significantly different US economy. Unemployment is low, and sticky inflation poses a greater concern than deflation. Economic growth is losing momentum, and global trade activity remains weak. With debt levels significantly higher and savings rates lower, there seems little room for major tax cuts. Additionally, valuations in both equity and credit markets look stretched.

Executing policy will prove far more challenging than discussing it, potentially exposing the world to greater tail risks or voter disappointment.

Chart of the week: Even the Brazilian real outperformed the euro

Source: Bloomberg, as of November 29, 2024. For illustrative purposes only.

Past performance is not a reliable indicator of current or future results.

References

[1] Bloomberg, ‘Market implied policy rates,’ as of November 29, 2024
[2] Citi, ‘Economic Surprise Index,’ as of November 29, 2024
[3] Bloomberg, ‘ECB May Need Rates at Stimulative Levels, Villeroy Says,’ November 28, 2024
[4] Bank of Japan, as of November 13, 2024
[5] Bloomberg, Cryptocurrency Index, as of November 29, 2024
[6] Bloomberg, ‘Brazil Markets Set For Weekly Tumble After Spending Plan,’ November 29, 2024

 

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. References to specific companies is for illustrative purposes only and does not reflect the holdings of any specific past or current portfolio or account. The opinions expressed by Muzinich & Co. are as of December 2, 2024, and may change without notice. All data figures are from Bloomberg, as of November 29, 2024, unless otherwise stated.

--------

Important Information

Muzinich & Co.”, “Muzinich” and/or the “Firm” referenced herein is defined as Muzinich & Co. Inc. and its affiliates. This material has been produced for information purposes only and as such the views contained herein are not to be taken as investment advice. Opinions are as of date of publication and are subject to change without reference or notification to you. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. The value of investments and the income from them may fall as well as rise and is not guaranteed and investors may not get back the full amount invested. Rates of exchange may cause the value of investments to rise or fall. Emerging Markets may be more risky than more developed markets for a variety of reasons, including but not limited to, increased political, social and economic instability, heightened pricing volatility and reduced market liquidity. Any research in this document has been obtained and may have been acted on by Muzinich for its own purpose. The results of such research are being made available for information purposes and no assurances are made as to their accuracy. Opinions and statements of financial market trends that are based on market conditions constitute our judgment and this judgment may prove to be wrong. The views and opinions expressed should not be construed as an offer to buy or sell or invitation to engage in any investment activity, they are for information purposes only. Any forward-looking information or statements expressed in the above may prove to be incorrect. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation that the objectives and plans discussed herein will be achieved. Muzinich gives no undertaking that it shall update any of the information, data and opinions contained in the above.

United States: This material is for Institutional Investor use only – not for retail distribution. Muzinich & Co., Inc. is a registered investment adviser with the Securities and Exchange Commission (SEC). Muzinich & Co., Inc.’s being a Registered Investment Adviser with the SEC in no way shall imply a certain level of skill or training or any authorization or approval by the SEC. Issued in the European Union by Muzinich & Co. (Ireland) Limited, which is authorized and regulated by the Central Bank of Ireland. Registered in Ireland, Company Registration No. 307511. Registered address: 32 Molesworth Street, Dublin 2, D02 Y512, Ireland. Issued in Switzerland by Muzinich & Co. (Switzerland) AG. Registered in Switzerland No. CHE-389.422.108. Registered address: Tödistrasse 5, 8002 Zurich, Switzerland. Issued in Singapore and Hong Kong by Muzinich & Co. (Singapore) Pte. Limited, which is licensed and regulated by the Monetary Authority of Singapore. Registered in Singapore No. 201624477K. Registered address: 6 Battery Road, #26-05, Singapore, 049909. Issued in all other jurisdictions (excluding the U.S.) by Muzinich & Co. Limited. which is authorized and regulated by the Financial Conduct Authority. Registered in England and Wales No. 3852444. Registered address: 8 Hanover Street, London W1S 1YQ, United Kingdom.