Animal Spirits

By Benjamin Picton, Senior Macro Strategist at Rabobank

US markets have been in risk-on mode since early votes for Miami-Dade County (usually a Democrat stronghold) in Florida hinted that US voters would be sending Donald Trump back to the White House. The S&P500 had its best week of a very good year last week to close 4.66% higher than the previous Friday. A well-telegraphed 25bps Fed rate cut helped the rally to last into the weekend, with assists from the BOE and Rijksbank who both cut their own policy rates.

The extra liquidity from the Fed cut probably helped Bitcoin to crack the $80k barrier over the weekend. That’s up $10k/coin in the space of one week as crypto bros anticipate a more friendly regulatory attitude emanating from the White House once Trump is inaugurated early next year. RaboResearch is expecting a 25bp cut in December and another in January. After that we think the Fed will be on hold as Trump hits the ground running with executive orders on tariffs and deportations, and legislation to cut taxes that will be a strong chance of passing through Congress now that the Republicans appear to be on track to secure majorities in both houses. The margin in the House might be thin, but it would be a brave GOP dissenter to push back against a renewed MAGA mandate that saw a Republican candidate for the Presidency win the popular vote for just the second time in 30+ years.

Elon Musk has come away as a big winner from the election. As one ham joked on X, Musk “spent $44 billion on Twitter and all he got was control of all 3 branches of the federal government.”

Tesla stock closed a touch over 29% higher last week, suggesting that markets aren’t concerned that Trump’s “drill, baby, drill” rhetoric or past criticisms of green energy subsidies contained in Biden’s Inflation Reduction Act will put a dent in the outlook for future earnings. Either that or markets are still just trading vibes at this point.

So, in a nutshell the animal spirits are back, but not every security is sending an unsubtle ‘risk-on’ message. US 10-year treasury bonds, for instance, actually closed last week higher. Yields fell 8bps on the week, despite a 16bps rise last Wednesday when the Trump win was first confirmed. Spot gold fell 1.89% to $2,685/oz, marking a second consecutive week of losses after a strong run of gains since the start of the year.

Diverging price action in gold and Treasuries is interesting. People buy gold for different reasons, but one way to think of gold is as an infinite duration, zero-coupon adjustable face value bond. The face value of gold has been adjusting higher all year as markets priced in lower policy rates at the front end, a future awash with debt, and uncertainty over the future role of the Dollar as reserve currency. It’s certainly too early to call a halt in the rally (especially while the fundamentals appear conducive), but the strong surge in the Dollar post-election has seen the $2,800/oz resistance level respected for the time being.

While US equities have been surging, the same cannot be said of other markets. The EuroStoxx 50 closed down 1.54% last week – it’s fourth-consecutive weekly loss – and the FTSE100 fell by 1.28% (it’s third consecutive weekly loss). The divergence comes despite US equities being priced much more richly than their European counterparts. Debt securities told a similar tale, with both 10y Gilts and Bunds outperforming their US counterparts over the course of the week.

So, ‘Make America Great Again’ is in the price, while managed decline in Europe seems to also be in the price. European leaders are understandably unhappy about this. Emmanuel Macron responded to Trump’s election win with a strange metaphor about herbivores and carnivores, which seemed to suggest that the European Union would be on the menu while the United States and China battled it out for geopolitical dominance.

The recent disintegration of Olaf Scholz’s government in Germany perhaps hints that Macron isn’t too far wide of the mark. Fresh figures last week confirmed an acceleration in the decline of German industrial production, while trade numbers also confirmed a fall in exports and final PMIs again revealed a manufacturing sector in rapid retreat. Forced weaning off cheap Russian gas has collided with a challenging geopolitical and trade outlook to make Germany in 2024 start to look a bit like Britain in 1974 (except without the debt problem).

Perhaps emblematic of the malaise is the startling admission of the President of the German electoral commission, Ruth Brand, that Germany may lack the state capacity to hold snap elections due to a shortage of paper ballots. Commenting on the logistics surrounding potential timing of an election, the CDU’s Thorsten Frei reportedly said “we must be careful not to make ourselves look ridiculous internationally with a debate at this level.” Unfortunately the horse may have bolted on that score.

Thankfully, European leaders seem to recognize the difficult position that the union finds itself in, although solutions remain elusive. Strategic autonomy may be the goal for leaders like Macron, but that recalls the punchline of a popular joke that in order to get there “I wouldn’t start from here”. EU leaders meeting in Budapest issued a statement on Friday committing to improve the functioning of the single market, take steps towards a savings and investments union by 2026, ensure industrial renewal and decarbonization, pursue energy sovereignty and pursue an “ambitious, robust, open and sustainable trade policy” (among other things).

These are all admirable ambitions, but the ‘how’ is going to be much more important than the ‘what’ for items like energy sovereignty, while ambitions for open trade looks like a continuation of wishful thinking in an increasingly mercantilist environment. As our Global Analyst Michael Every has recently elucidated, economic statecraft is becoming more important than ever. Perhaps the political animals of the EU need to do more to recapture the spirit that led to previous success?