Markets Weekly podcast – 18 November 2024
18 Nov 2024
What could the US election result mean for FX markets?
25 November 2024
Join Bhaskar Gupta, our Head of FX Distribution UK, as he ponders the impact of the US election result on global currency markets. Topics include the sharp appreciation of the US dollar since, and the market reaction to the Republican victory. He also considers the health of sterling following last month’s Budget and policy options for the European Central Bank.
Meanwhile, podcast host Julien Lafargue examines Nvidia’s third-quarter earnings results, UK inflation and the eurozone’s latest macroeconomic data.
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Julien Lafargue (JL): Welcome to a new edition of Barclays Markets Weekly podcast. My name is Julien Lafargue, Chief Market Strategist here at Barclays Private Bank, and I’m back as the host today.
We’re going to go through the usual pattern. I’m going to look at what happened last week, and I’m delighted to be joined by Bhaskar Gupta, our resident FX specialist, to discuss everything currency-related, which is something that we haven’t really discussed as part of our ‘Outlook 2025’.
Now, before that, let’s look at the week that was. And it was a fairly quiet week. I think the highlight, at least in the US, was around the report by Nvidia. This is a company that has a market cap that is larger than both the CAC 40, in France, and the DAX, in Germany, those two major indices combined. So, clearly, when a company as big as that publishes earnings, people tend to pay attention. And there were a lot hopes, or maybe expectations, that this would be a market-moving event.
The reality is, at the end of the day, Nvidia didn’t move that much. Results were pretty much in line with expectations. Q4 revenue had a slightly different scheduling in terms of reporting, but their Q4 revenue guidance was slightly below expectations, yet the stock ended up on the day, after it published roughly flat data. So, a lot of excitement going into the release, but nothing really happening after that.
I think there was something a bit more interesting happening when it comes to earnings, and that had to do with US retailers. We had two companies, Walmart and Target, publishing earnings and the results were vastly different.
On the one hand, Walmart saw its shares jump 7%, on the basis of stronger-than-expected sales figures. On the other hand, Target saw its shares plummet by almost 18%, after the company missed on most key metrics, flagging some weakness in higher-margin discretionary. And, noting that customers are becoming more promo-seeking, looking for better bargains and better deals.
And that really illustrates what we’ve tried to explain in our Outlook 2025, which is that it’s all going to be about selectivity and looking at the fundamentals, and the dynamics, at the company level. Here, you can see clearly, that within retail two very different reactions and two very different sets of results have been seen.
Now, moving back to the macro picture, I think the main development last week came from the eurozone, where we did get quite disappointing and poor PMI data. The eurozone composite PMI surprised to the downside, quite significantly so. It printed at 48.1, with softness in both sectors, manufacturing and services, so it really looks like the eurozone economy is contracting.
And, in addition to that, we got a consumer-confidence indicator that decreased markedly in November, and Germany’s Q3 GDP figures were revised slightly to just +0.1% quarter over quarter.
So, on balance, clearly the data we got from last week, and prior weeks, strengthened the case for the European Central Bank, the ECB, to cut rates by 50 basis points when it meets in December, and markets are pricing in almost a 50% probability of such a move.
That said, first, there is still time between now and that meeting, and we think that the ECB will stick with a 25-basis point move, but might then accelerate beyond that, and we do see a risk of a higher 50-basis point cut in January and/or in March.
Now, finally, back to the UK, the main news of last week was the October inflation release. It was slightly stronger than expected, accelerating to 2.3% year-over-year. Now, a lot of that was due to a hike in energy costs, but there was also some upside surprise in core goods and other volatile elements of services. Although the underlying service inflation continued to ease, it does look like the data is not justifying a cut in the Bank Rate by the Bank of England in December, at least the market sees it that way, with only a 15% chance of a cut being priced in, at this stage.
We’re talking a lot about central banks and maybe this is the right time to bring in Bhaskar, because obviously what happens with rates will have consequences to what happens in the currency markets. Bhaskar, welcome back to the podcast. It’s always great to have you.
Look, FX markets have had quite a move, let’s say, since the US election. Can you set the stage to start with, and tell us what has happened, what’s happening and how you see the currency market at the moment?
Bhaskar Gupta (BG): Yes, sure. Thanks, Julien, and like always it’s always a pleasure to be on this podcast.
So, yes, the FX markets have been very active and, while there has been decent volatility, you know, short-term price action has been two-way. The bigger move has been rather unidirectional, and we have seen some significant dollar appreciation, not just as a result of the US election outcome, but even from before that.
So, the dollar had been appreciating steadily over the last two months. In October, it was due to a shallower, and slower, rate-cutting cycle, that was being priced in, from the Fed. And then, in November, with the Trump victory, the economic momentum has shifted further in favour of the US.
So, dollar strength has been pretty much a one-way street and we have seen cable and the euro being sold off at every level. You know, they are just not able to sustain any bounce whatsoever, so, any level has been sold off and the market is just long dollars at this point of time.
Just to give you some numbers, to put this into context: cable has come off from a high of $1.34 to $1.25. This morning, it was around $1.2590, $1.26. And the euro has also come off from a high of $1.12, back in September, to $1.04 currently.
So, the dollar index has moved from 100 to 107 in two months, and this is now at levels that we saw pretty much going back, I think, to Q3 last year. So, it’s quite a while back that we had the dollar this strong.
JL: And, I think, the strength that we’ve seen in the dollar was somewhat reinforced by the announcement late last week that the president-elect had chosen Scott Bessent as Treasury Secretary. Turning to the hedge fund executive, to serve in a role that will be very, very important. I mean, you have key oversight of the massive US government debt market, tax collection, as well as economic sanctions.
And we know that Scott Bessent is a big proponent of deregulation. He has advocated slashing the deficit, but the reality is that we still don’t really know how that could be achieved. But clearly, the market saw this as a positive development, and we’ll see what comes out of it. But, you know, back to what you were saying, Bhaskar, and you mentioned the Trump victory. Of course, that has had a significant impact across markets, not just equities or fixed income, but also in currencies. Do you think that this so-called Trump Trade is going to continue in the FX market as well?
BG: Yes, you know, that is the overarching theme, that is the biggest narrative currently in the market. And if you look at it, you know, the seat of power has already shifted from the White House to Mar-a-Lago, you know, wherever the Trump residence is, and that in itself is a harbinger of things to come.
And, like you mentioned, we saw Bessent being the chosen nominee for the position. His hedge fund background, him being seen as a proponent of deregulation, is another positive tailwind for the market.
So, if you roll back to the election, first and foremost, the markets breathed a collective sigh of relief, with the conclusive election result. Just the fact that the result is a clear mandate for one candidate, and not a messy disputed affair like last time, that gave a lot of respite to the market. So, everything rallied in a bit of euphoria. So, the entire financial landscape was reset, to some extent.
Had the Democrats won, it would have just been a continuity of their policies, but with the Trump win it’s all changed. So, Trump has indicated that his policies around tariffs and tax will be different. If those are implemented, they can lead to higher inflation and will have a direct impact on the Fed’s response and, hence, the US dollar.
So, while it remains to be seen when these are implemented, how long it takes and to what extent these are implemented, these will keep the US dollar strong for now. We do see, you know, the dollar being stronger as a direct impact of this and currencies like, you know, the Mexican peso, Chinese yuan, to bear the major brunt of Trump’s protectionist policies.
JL: Yeah, and you were mentioning the Fed and how it might react to Trump. I think it’s important to stress at this point, future policies. The reality is, if we think about the shorter term, and that’s the message that we got during the Fed’s last press conference, from chair Jerome Powell, that the central bank is not looking at what may come next with regards to the Trump administration, they’re very much focused on the data.
And the data that we’re going to get, and that will probably influence whether the Fed does something in December or not, is the November employment report, which will be released on 6 December. At this point, the market is only pricing in a 60% chance of a 25-basis point rate cut then.
Now, we’ve discussed the US, and why the dollar might stay strong. Let’s look at the other side of the FX trade, so to speak, or the other side of the dollar. So, how do you see the euro or the pound exchange rates playing out?
BG: Yes, you know, like you mention, all central banks have to be reactive. They always have to keep their options open at any given point of time.
In terms of the euro and sterling, when it comes to these two, we are kind of bearish on the euro and rather neutral on the pound sterling. I’ll come to the details. But on sterling, we think a closer UK/EU relationship will ultimately benefit sterling. It will lead to better growth in the UK, so ultimately benefiting the currency. And that will also lead to a lot of, you know, the Brexit discount, that was priced into sterling, for that to be priced back out, meaning that will be favourable for the currency.
Plus, obviously, with the most recent UK Budget, the Chancellor’s spending plans and the fact that inflation is still not down in the UK to where the Bank of England would want it to be. The rate cuts from the Bank of England will be less than had been expected as well, therefore, keeping the currency supported. So, we are neutral-ish, even mildly positive on sterling.
But the opposite is true for the euro. So, central banks are all steady on their cutting path. You mentioned PMI data that didn’t come out as good as expected last week. Overall, the ECB will have to look at the sluggishness of the EU economy and be dovish. But they also need to deal with the prospect of the tariffs from the US. So, with an outlook like that and the ECB cutting rates, the euro will remain under pressure.
JL: Yeah, and I think you will also have a lot of political uncertainty in the eurozone, in particular. So, OK, I guess a stronger US dollar or at least remaining strong, potentially a weaker euro, a sort of stable pound, let’s call it this way, how can investors take advantage of those views, and how do you think they should position for the medium term?
BG: Yes, so hedging off any dollar assets comes to my mind as the first thing. So, what I mean by that is investors in the UK or eurozone, that have any sort of dollars, it can be in the form of an equity portfolio or a bond portfolio, they are sitting on a 6% to 7% gain on their portfolio in home-currency terms, just because of the appreciation of the US dollar over the last two months.
So, this has happened quite quickly and it’s a windfall gain that those investors can look to lock in. So, by hedging those gains the investors can negate any further future fluctuation in their asset value just because of the currency moves. This can be done by forwards options, or even investors who are OK with slightly more risky approaches, they can even use products like accumulators, target-redemption forwards to achieve better rates, though I would just like to caveat it by saying that they really need to understand the risk/return of any instrument before entering into one.
There’s one more I would say, a very simple unleveraged instrument that investors can make good use of in the current environment, and that’s dual-currency investment. So, with the current dollar strength, dollar-based DCIs are paying a handsome yield with even good strikes of say $1.24, $1.23 on cable, or, as well as $1.03, $1.02 on the euro, yields of 7% to 8% on a one-month, two-month basis, DCIs are a good return.
JL: That does sound very interesting, and I encourage anybody who may be interested to get in touch with you or their Barclays contact. That was great. Thank you very much, Bhaskar. Any other thoughts from you?
BG: I guess, of course, we are coming into year-end. In terms of risk, you know, I was just thinking this morning, geopolitical tensions will continue to simmer. You know, the Russia/Ukraine conflict, tension in the Middle East, oil prices, it’s all linked and that could have a big impact, so everyone needs to keep an eye on that one.
The Fed probably is indicating that they’re in no rush to cut, so that again, you know, keeps the dollar stronger. The dollar also has a ‘safe-haven’ appeal that can’t be forgotten about. So, a lot of moving parts, but we need to stay alert, as always.
JL: Totally agree, and I do feel looking at markets in general across asset classes, it does feel like markets have a cheerful mood going into the end of year, something that it’s always worth monitoring because during those periods of elevated enthusiasm, the slightest negative news can have an outsized impact, so we need to watch for a potential curveball going into Christmas.
And, looking at the Fed, and the fact that it might not be as relevant going into the end of the year, I think I would agree that the ECB is a more interesting central bank to look forward to in December. But we will get, this week, the FOMC meeting minutes from the last meeting, which will be interesting to monitor, as well as the US PCE, so the inflation data that the Fed looks at the most, for October.
Now, we pretty much know what the PCE is going to be, given we can derive it from other inflation readings, including the CPI and the PPI. But, nonetheless, this is something that markets will likely pay attention to. And probably the most important release for this week will be the eurozone CPI, so inflation for November, that will hit on Friday. And this is pretty relevant, given that the uncertainty around what the ECB might do next, and this expectation that the ECB could actually go for 50-basis points cut.
The forecast is for eurozone CPI to accelerate at both the headline and core levels, which, in fact, could complicate expectations for an aggressive ECB rate cut in December, and, it’s fair to say, I think, that eurozone data has been quite ‘stagflationary’ of late. So, this is probably the one data release that we’re going to pay the most attention to and that we will debrief next week, when we’re back.
In the meantime, as always, we wish you all the very best in the trading week ahead.
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