This week has been anything but dull for the financial markets. A series of major events stirred both excitement and caution among investors. With Trump securing a win in the United States (US) election, the Bank of England (BoE) announcing its latest rate decision, and China’s anticipated fiscal meeting over the weekend, this week has been a whirlwind of activity for global markets.
Key themes:
- Trump takes back the oval office
- BoE and Fed both cut interest rates by 25 basis points
- Wall Street reaches new record highs
- South African rand on the front foot
THE GLOBAL SWINGS AND ROUNDABOUTS
Trump’s win and market ripples
Donald Trump’s election victory set off an immediate response in the markets. Known for his unpredictable policies, Trump’s re-election left investors re-evaluating their positions. Initially, the South African rand, along with other emerging market currencies, took a hit. The rand dropped by around 2.5% before rebounding, reflecting both the currency’s vulnerability to global events and its ability to regain its footing quickly. The Mexican peso also slid, while commodity-sensitive currencies showed similar volatility.
Markets are already factoring in potential protectionist policies, which could impact everything from trade dynamics to commodity demand. Trump’s previous approach to international trade—and his hardline stance on BRICS countries, including China—adds another layer of complexity. Investors in South Africa are particularly watchful, as any pressure from the US on South Africa’s BRICS (Brazil, Russia, India, China and South Africa) affiliations could impact trade relationships and thus the rand’s stability. But despite initial turbulence, the broader US markets stabilised, suggesting that investors might be cautiously optimistic about Trump’s fiscal promises, even if they’re on edge about the potential for trade barriers.
The BoE and Fed cut interest rates
In other news, the BoE moved to cut rates by 25 basis points, in line with expectations. While this is the second cut for the year, the BoE continues to hold a cautious stance. The decision, supported by nine policy makers, was broadly aligned with data indicating a slowing pace of United Kingdom (UK) economic growth. The UK’s September inflation reading dropped to a three-year low to 1.7%, while services inflation saw a decline to a two-year low.
Meanwhile, the Federal Reserve (Fed) also cut rates by 25 basis points, reducing the Fed funds rate to the 4.75% to 4.5% range, and committed to continue to support the US economy and jobs market. In the wake of Trump’s election win, Fed Chair, Jerome Powell, also took a firm stance on speculation that the President Elect would be able to remove him as Fed Chairman or intervene in the policy and decision making of the US central bank. Powell firmly stated he would not leave his position if requested by Trump and clarified in a press conference, following the rate cut, that any attempt to remove or demote a Fed board member, including himself, is legally prohibited.
Eyes on China: the upcoming fiscal meeting
Looking ahead, markets are gearing up for China’s key fiscal meeting set for the weekend. With China’s economy slowing this year, there’s intense speculation about what measures might be introduced to reinvigorate growth. Investors are watching closely to see if there will be additional stimulus or tax reforms aimed at lifting domestic demand. Aggressive fiscal policies to lift China’s economy, could also provide a needed boost for the global economy, particularly in commodity markets, which are closely tied to China’s consumption patterns.
For South Africa and other commodity-exporting nations, China’s decisions could have a direct impact. A focus on infrastructure spending or increased investment in energy and metals would likely support demand for commodities like copper, iron ore, and coal. This would be welcome news for the rand, which often moves in tandem with global commodity demand. On the other hand, if the fiscal meeting concludes without a substantial stimulus plan, there could be a temporary dip in commodity prices, creating another wave of volatility.
What’s next?
What can we expect as these developments continue to unfold? For one, Trump’s policies will remain a major focus, especially as investors adjust to his re-election and the possible protectionist trade moves that could follow. Meanwhile, the BoE’s cautious stance and Jerome Powell’s robust communication suggests that central banks will continue to offer markets some stability amid unpredictable geopolitical shifts.
And with China in the spotlight this weekend, investors are preparing for any outcome. Positive fiscal reforms could lift markets, offering a smoother ride for commodities and emerging markets alike. But as always, the road ahead is bound to have its twists and turns. For now, investors are keeping one eye on the headlines and the other on the markets.
KEEPING UP WITH MARKET MOVES
Yields decline on the back of Fed rate cut
The yield on the US 10-year Treasury note dropped below 4.35% on Thursday, after a previous session’s spike pushed it to 4.44%, its highest level in four months. This came as the Fed reduced rates by 25 basis points, meeting expectations, while markets weighed Trump’s policies’ effect on growth and inflation. The Fed observed that labour market conditions were easing and that despite being slightly elevated, inflation was slowing. Despite the cut, the Fed will maintain its current pace of balance sheet reduction. Markets anticipate a further 25-basis point rate cut by the Fed in December.
The UK 10-year Gilt yield was around 4.55%, close to a one-year high. The BoE cut rates by 25 basis points for the second time this year but indicated a cautious approach to further reductions, maintaining a focus on restrictive monetary policy. BoE projections indicate inflation rising to 2.5% by year-end, while recent budget measures could lift UK gross domestic product growth by up to 0.75%. Markets expect two more BoE rate cuts in 2025, though the probability of another cut hovers around 50%.
Trump win sees US equity skyrocket
US stock futures steadied after a strong rally, with Trump’s election victory bolstering investor sentiment. The Dow Jones surged 3.57%, the S&P 500 rose 2.53%, and the Nasdaq gained 2.95%, with the Russell 2000 climbing over 5%. Markets anticipated benefits from Trump’s pro-business policies, especially tax cuts and deregulation, which are seen as potential growth catalysts. Key beneficiaries were financials, energy, and industrials, with tech stocks also advancing. Renewable energy stocks and Chinese companies, however, faced declines.
The UK’s FTSE 100 edged down, reaching 8,155 as the market assessed the BoE’s rate cut’s impact. Shares of multinational telecommunications services company, BT, plummeted nearly 8% following a downward revenue revision, while digital vehicle marketplace, Auto Trader and British multinational aerospace and defence company, Rolls Royce, posted declines due to profit misses. Grocery retailer, Sainsbury’s faced pressure from its competitor, Argos’s weak results. Miners helped cushion losses as Glencore, Rio Tinto, Antofagasta, and Anglo American advanced on recovering base metal prices.
Germany’s DAX rose 1.2% to around 19,260, recovering from previous losses driven by concerns over Trump’s re-election impact on the European economy. The auto sector bounced back, with Mercedes-Benz, BMW, Porsche, and VW gaining. Corporate earnings contributed to investor optimism. Daimler Truck surged nearly 5%, while defence industry supplier, Rheinmetall, added 1.8%, and reinsurance company, Munich Re, increased 0.9% on higher revenue forecasts. However, Germany reported declines in industrial production and exports. Additionally, Chancellor Olaf Scholz’s decision to dismiss Finance Minister Christian Lindner, has effectively ended the current governing coalition.
The JSE Index in South Africa inched higher, trading above 85,800, as global markets weighed the effects of Trump’s second term and the Fed’s rate trajectory. Historically, Trump’s “America First” policies have contributed to volatility in emerging markets like South Africa. Locally, wood fibre producer, Sappi, led gains, jumping over 8% on better-than-expected third quarter earnings, with strength seen in resource-linked stocks and financials.
Trump win dulls gold
Brent crude oil futures hovered around $75.10/barrel on Friday, heading for a weekly gain as investors evaluated the effects of the Fed’s recent rate cut and the anticipated policies of the Trump administration. The Fed’s 25-basis point cut to 4.50% to 4.75% supported oil prices by aiming to sustain growth. Expectations of potential sanctions by Trump on oil producers like Iran and Venezuela also boosted prices due to likely supply reductions. Additionally, markets are closely watching for possible stimulus from China, which could spur demand. Meanwhile, Hurricane Rafael has led to production cuts in the US Gulf of Mexico.
Gold prices hovered near $2,700/ounce, following the Fed’s interest rate announcement and policy meeting, after trading at a three-week low. Following Trump’s victory, gold declined by 3% as the dollar strengthened, reducing demand for safe-haven assets. Anticipated higher long-term interest rates, driven by Trump’s policies on tariffs, tax cuts, and deregulation, are fuelling expectations of increased inflation and larger deficits.
Currency markets digest the aftermath of the Trump victory
The US Dollar Index remained stable, around 104.5 on Friday morning, as investors digested the Fed’s rate cut. Fed Chair Powell emphasised a flexible, meeting-by-meeting approach to US monetary policy. Markets anticipate another quarter-point cut in December, though strong inflation or labour market data could change this outlook. Concerns about Trump’s potential return to the presidency have led investors to scale back expectations for rate cuts in 2025, fearing inflation from proposed tariffs.
The euro rebounded to $1.078/€ after hitting a four-month low following Trump’s re-election, driven by renewed “Trump trades.” European markets worry about the economic impact of Trump’s policies, including tariffs on key sectors and geopolitical tensions. The European Central Bank is expected to cut rates by 25 basis points in December, aiming for a 2% inflation rate by mid-2025.
The British pound approached $1.30/£ after the BoE’s second 25-basis point rate cut this year. The BoE is projecting inflation to rise to 2.5% by year-end, yet is anticipating further rate cuts to boost the stalled UK economy.
Meanwhile, the South African rand strengthened to R17.30/$, tracking gains in commodities. The rand is well positioned to gain further momentum, as all eyes are now on this weekend’s Chinese fiscal meeting.
Key indicators:
USD/ZAR: 17.37
EUR/ZAR: 18.73
GBP/ZAR: 22.53
GOLD: $2,694.31
BRENT CRUDE: $75.14
Sources: Reuters, Financial Times, Refinitiv, Bloomberg and Trading Economics.
Written by Citadel Advisory Partner and Citadel Global Director, Bianca Botes.