AXIOMA ROOF™ SCORE HIGHLIGHTS

• US: Fed Chair Powell speech, manufacturing & services PMI data, consumer sentiment index, and the November jobs report.
• Europe: Eurozone unemployment and retail sales data. Germany’s factory orders data and France’s manufacturing production numbers.
• APAC: China PMI data. Speeches from BoJ officials in Japan. Australia’s Q3 GDP data.
• Global: The wars in Ukraine and the middle east remain in their most dangerous phase yet ahead of January 20th.

Last week, investor sentiment turned bearish in Asia ex-Japan and Global Emerging markets. Meanwhile, sentiment stayed negative in Europe and Global Developed markets as investors reassessed the impact of potential tariffs from the Trump administration on those economies. Positive macroeconomic data in Australia (inflation) and China (growth) kept sentiment positive in these markets, while investors in the US, UK, and Global Developed ex-US markets remained neutral. 

The risks to sentiment in the near-term include US monetary policy (FOMC meeting on December 18), further tariff threats to global trade from the Trump administration (any Tweets now), and the (very) high degree of concentration risk (Magnificent-7) and overvaluation (S&P 500 Shiller CAPE Ratio is at a current level of 35.23) in US equities.

US Monetary Policy: Last week’s FOMC minutes revealed that Federal Reserve officials were optimistic about declining inflation and a strong labor market, hinting at the possibility of additional interest rate cuts, albeit cautiously. They cautioned against premature rate reductions. Notably, the meeting did not address the economic impact of Donald Trump’s recent presidential election victory but stressed the need for flexibility. In essence, the FOMC minutes were specific enough to make investors anxious, leading them to lower their expectations for another 25bps rate cut at the December meeting from 82% a month ago to 66% now, but vague enough for the Fed Chair to be able to deny wanting to have done so during his upcoming speech this Thursday. 

Classic Powell.

Trump tariff threats: In a Trump administration, loyalty trumps ideology, making his decisions unpredictable based solely on ideological grounds. When Trump decides it’s time to strike a deal, he expects full support from those around him, and anyone obstructing this will likely face consequences similar to those experienced by many of his first-term cabinet members. Foreign policy is equally unpredictable in a transactional administration, where any world leader can privately negotiate a deal and potentially reverse policies. This new diplomatic approach was evidenced last week when Trump and Mexico’s President Sheinbaum had “productive conversations on cross-border flows”, resulting in a slight easing of tariff concerns. A meeting with Canada’s PM Trudeau was next.

The ongoing threat of tit-for-tat tariffs and their associated impact on both inflation and global growth has got investors feeling like Al Pacino in the Godfather III – “Just when I thought that I was out, they pull me back in”. 

Concentration risk: Until January 21^st, markets will sway to the sound of Donald Trump’s Tweets (sorry Elon), making investors feel trapped in an M. C. Escher drawing, where stairs that appear to be going up are actually going down, and vice versa². Uncertainty about what comes next (the unknown unknown), will keep investors crowded into the magnificent seven (the known unknown), adding to the already high degree of concentration risk in the market.

The “magnificent seven” – that’s not a lot. It’s not just not a lot of magnificence for a blue chip index to have, but it’s not a lot of companies to be considered magnificent in one index. It makes you think about how fragile the rest of the index must be to not even be considered.

¹ If sentiment is bearish/bullish, a negative/positive surprise on these data releases could trigger an overreaction.

² Ascending and Descending - Wikipedia