#2 Off to a Rough Start

UK Optimism Fizzles

10-year yields rocketed to 4.82% (highest since Aug 2008), while the pound dropping below $1.23 and €1.19. Despite higher disposable income, consumer confidence remained subdued in 2nd half 2024. "Shadow" expectations were over-inflated. Interest rates sticker-than-expected, with a new government aggressively pessimistic and a budget squeezed the private sector to fund more spending on the public sector. Deutsche Bank estimates that UK's interest burden in 2029/30 will be ￡10 billion higher than had been expected when Reeves delivered her budget.

Euro-USD Parity

Europe is one of the most vulnerable to Trump's tariff threats. US is a big buyer of EU exports and tariffs would weigh on an already weakening economy. Low growth coupled with low interest rates don't bode well for EU. Since the US elections, 10 banks moved to forecast a weaker euro in 2025. Hitting parity is psychologically significant for investors and policymakers which could spur a period of volatility and embolden populist politicians who oppose the single currency. Weakening euro would spur import-inflation, making it harder for the ECB. However, it is unlikely for a direct intervention to support the euro.

EM Assets Fall, Hit by Fed Rate Caution

MSCI EM index fell 0.5% pressured by dollar strength and US curbs on AI chip exports. Goldman Sachs strategists trimmed forecast of EM year-end target to 1190pts (from 1200). Minutes from the Fed meeting revealed officials were inclined to proceed cautiously on interest rate changes in the months ahead. Cost of hedging Asian investments for dollar-funded investors is set to drop from a two-year high, a shift that could reduce support for the region's currencies.