The Daily Fix – A taste of what lies ahead over the next four years

If traders wanted a taste of what lies ahead, well, The?Donald laid it on the table in a speech through US trade which suggests?we are looking at a wild four years ahead.

Trump covered thoughts on Greenland, the Panama Canal, Mexico, Canada, the hostage situation in Gaza, Ukraine and tax and immigration policy. For the neutrals in the market, his views, if he is to be credible on the myriads of hard-hitting polices, further raise the prospect of market players navigating fast-moving, headline-driven markets. And where such an unconventional and hawkish approach is something that will soon lose its shock factor.

Whether Trump’s views impacted markets is unclear, but the totality of the speech won’t have done risk any favours, and the?buyers (of risk) simply moved aside, and allowed?those exiting long risk (equity etc), amid a pick in short positioning, to move prices lower with increased ease.

US data was the key driver of risk on the day?

Arguably the overriding factor in the session was the solid US data flow, with both?the JOLTS report and ISM Services report coming in hot and causing some ripples in US rates and bond markets.

The JOLTS report showed 8.098m job openings, boosting the job openings rate to 4.8%, with the quits rate falling 20bp, where 1.9% matched the lowest levels since June 2020. The ISM Service print came in at 54.1, showing good expansion across most of the subcomponents – we did see a slight down in the employment component to 51.4, but it was the prices paid element coming in at 64.4 and the highest level since 2023, which has been most talked up.

I had been in the camp that equity, like the USD, would have welcomed solid US economic data, but my?view is irrelevant, and it is always about how the collective in the market interprets the data and how the weight of money responds. The initial reaction was to sell duration, with the 10-year Treasury spiking from 4.64% to 4.69% with yields pushing to new cycle highs.

Higher inflation expectations, a strong USD, and reduced expected Fed cuts?

In US rates, we have a small repricing of implied cuts for 2025, with SOFR futures now pricing just 33bp of cuts for 2025. Further out, we’ve seen 4bp of implied future Fed cuts priced out of the rates curve, with the market pricing of the perceived terminal rate (the low point in the Fed’s cutting cycle) rising to 4.02%.

Inflation markets have also responded with US 10yr?breakevens +4bp and US 5y5y inflation swaps +5bp. These need monitoring, as the Fed will be looking at markets-based?measures of expected inflation very closely.

As a test of investor demand for yield at current levels, the Treasury Departments $39b 10yr?reopening auction saw average demand. While it was certainly better than what we saw earlier in the week (in the 3yr?auction), the bid-to-cover (at 2.53x), the low tail, and level of buying from indirect players, suggests?this went away fine, but there wasn’t the signs of insatiable demand from the private market that some were looking for.

Increased supply remains the key driver of bond yields?– but let’s not forget this is not just a US story, long-end?bond yields are rising in the UK, Europe, Japan and Australia.

We’ve opined that equity and credit have recently been able to absorb higher long-end Treasury yields, but the reaction today was wholly different. S&P500 futures and cash equity fell from the moment?the data dropped, and where US rates and Treasuries were offered. Something changed in US trade, and while we’ll see if the effects can last, it seems the market is now seeing the combination of reduced Fed easing, a higher discount rate, a strong USD, early signs of rising inflation expectations and a US economy - at least in a number of?data points - that appears to be reaccelerating.

US nonfarm payrolls on Friday takes?on new meaning and we question if?good data in the report will result in traders taking risk off the table.

Market moves on the day

On the day, the S&P500 closed -1.1% at 5909, with 59% of stocks lower on the day. Energy and Healthcare were the sectors in which?to hideout, helped by a 1.2% rise in crude. Tech, consumer discretionary and comm services closed firmly in the red, with Nvidia the standout play, having an ugly session and closing -6.2% - clearly, investors wanted more from CEO Jensen Haung at CES2025. The NAS100 fell 1.8% because of Nvidia, with all the MAG7 plays closing lower on the day.

In FX markets the DXY firmed up 0.4%, although the moves across major currencies were quite contained with USDZAR the big mover putting in a rise of 0.7%. One can look at the US Treasury market as an influence on the USD, but while many are talking about the persistent rise in long-end yields, a 5bp rise in the US 10yr is not that punchy, and its yield premium over other DM bond markets didn’t increase too?any great degree.

Interestingly, Bitcoin?– which?has shown a low sensitive of late to the US data flow and US bond yields - did?react to the US data, falling from $100k to a low of $96,126.?I’m not sure how many in the crypto scene would have been aware of the data on the calendar or the dynamics shaping up in US rates/Treasuries, and many will be questioning the factors behind the move in crypto.

Gold seems to be another good place to hide out, and while?we did see some selling off session highs of $2664 on the spike in bond yields (driven by the US data). It feels as though gold will be a solid hedge not just on?the upcoming Trump tariffs?– which are well priced?- but the retaliation measures from other nations, which is where cross-asset volatility could spike and is not priced.

Asia equity to open lower - eyes on Aussie CPI?

Turning to Asia, our opening calls suggest a lower opening for all equity indices. That said, while we’ll see the NKY225 give back some of the 2% gains seen in trade yesterday, the expected opening falls look manageable. I guess?we?must ask whether there is reason to buy risk today, and with the overnight developments, I‘d argue that there isn’t – so we could feasibly see a grind lower from the open.

On the risk docket, the main event will be Aussie November CPI (11:30 AEDT), which could go some way to influencing the pricing in Aussie rates/swaps - with 16.5bp of cuts priced for the RBA Feb meeting, today's CPI data could heavily influence that pricing. Subsequently, we could easily see some increased vol?in the AUD over this release, so keep an eye on AUD position here. In the US we get the ADP payrolls report, jobless claims and the Dec FOMC minutes.

Good luck to all.

Pepperstone #trading #markets