By Falco
22 Jul 2024
• US Presidential election twists and turns are centre stage of a further rise in market geopolitical concerns
• President Biden's decision to stand down may help to dampen some of the more extreme alarm about a Trump Presidency
• Rising/stubbornly high long term US interest rates indicate market concern about the long term US debt management.
• The Gold price's new all-time high indicates that investors are worried - a favoured asset class of millennial and Gen Z investors.
• Tech stocks need good Q2 results to arrest the sharp drop in the NASDAQ index
• Does Goldilocks still exist? - key US inflation and growth data this week
These are uncertain times, and geopolitics is still very much at the fore with the not-so-unexpected decision from US President Joe Biden to withdraw from the presidential race. The messy soap opera that the US political scene is currently witnessing reminds us to keep wondering—and challenging—why global investors have so much money parked in US assets. The US has a 70% weighting in global equity markets, and the preferred bond benchmark is the Global Aggregate Index of dollar debt.
The so-called leading country of the free world faces a presidential election fraught with distinct challenges. In the past few weeks, the president, who was previously seeking re-election, was debilitated by COVID-19, raising pressing concerns about his health and mental awareness. On the other hand, the Republican candidate has been embroiled in controversies, including threats of incarceration of political opponents – and sporting various bandages following an attempted assassination. The scenario seemed almost surreal. The prospect of Kamala Harris as the Democrat candidate may take the edges off the building angst in the market about outcomes from the Presidential election, but it will not deflect the growing concerns about some of the more extreme rhetoric and potential policies of Donald Trump. Extraordinarily a recent Reuters poll found that 80% of Americans agreed with the statement that 'the country is spiralling out of control'.
US government debt not acting as a safe haven
Despite a risk-off sentiment last week fuelled by geopolitical concerns, US Treasuries did not perform their usual safe haven role as expected. The US 5-year and 10-year government bond yields rose by 6 bps each to 4.17% and 4.24%, respectively. This rise indicates that US bond investors are wary of the times ahead.
Trump and an ‘Unsettling’ Agenda
Donald Trump, the leading candidate for the US Presidency, continues to push an agenda that could unsettle the global community. For instance, his spending plans and tax cuts require a massive leap of faith to believe that they achieve any reduction in the budget deficit and aggregate government debt. Some of his policies could potentially generate more inflation, particularly if they place barriers on the development of renewable energy at a time when the tech industry power needs to add substantially to demands on the grid.
Federal Reserve Independence Under Scrutiny
Trump has also questioned the Federal Reserve's independence, frequently criticizing Chairman Jerome Powell. Although a new president cannot easily change the Fed's leadership, with Powell's term extending until 2028 and Vice Chair Philip Jefferson's until 2027, the Federal Reserve Act allows governors to be removed "for cause." Legal experts generally interpret this as meaning malfeasance or dereliction of duty.
In the short term, Trump seems at odds with the Fed, arguing against rate cuts ahead of the November elections. He recently commented, "maybe they will do it prior to the election… even though it’s something they shouldn't be doing." This perspective contrasts with Fed officials like Governor Christopher Waller and New York Fed President John Williams, who have supported a rate cut by September.
Global Implications of a Trump Presidency
The international dialogue increasingly considers the implications of a Trump presidency:
Gold's All-Time High Amidst Uncertainty
Amidst this uncertainty, Gold reached a new all-time high last week, closing at $2,469 on Tuesday. Gold's behaviour has increasingly diverged from its traditional patterns. The negative correlation between Gold and the dollar weakened last year to -0.4% from -0.6%. Similarly, its correlation with interest rates has diminished.
Chart 1: Lower negative correlation between Gold and the dollar
Source: Bloomberg
Political uncertainties and potential shifts in economic policy heavily influence the investment landscape. Despite their traditional safe-haven status, US Treasury bonds are underperforming, and Gold has become an increasingly attractive alternative. The prospect of a Trump presidency introduces additional risks, including heightened geopolitical tensions and potential disruptions to monetary policy, creating a complex and volatile environment for global investors.
An interesting study by Bank of America Private Bank found that among wealthy investors under the age of 43, 45% owned gold as a physical asset and another 45% are interested in holding it. These millennials and Gen Z investors' appetite for gold is far higher than other age groups.
President Biden's withdrawal may reduce some of the immediate market angst.
In the aftermath of President Biden's decision to withdraw from the presidential race, we can almost hear a collective sigh of relief. That will undermine some of the momentum built on the view that Donald Trump will most likely win the next presidential election. Maybe small caps won't quite push on against the large caps, and maybe there will be some reversal of the sell-off of in tech in the coming days.
It is an important week for tech after last week's sell-off. The global tech-related outages, apparently caused by a product from CrowdStrike, only added to the sector's worries about the security of chip manufacturing. Stories suggest there could be further tech-related trade wars with China. Technically speaking, the NASDAQ 100 is sitting at a critical support level. This week's results from Alphabet (GOOG) (Tuesday) take on even more importance in supporting the sector.
Chart 2: NASDAQ 100 at Key Support Level
Source: Bloomberg
Goldilocks in the economic data?
Critical US economic data this week includes the US PCE deflator and GDP data. In a Goldilocks scenario, a mix of a lower-than-expected PCE and a solid gain in GDP would help. The markets expect 0.2% PCE month-on-month and
Can calm follow the volatility?
We might also see some reversal of the recent surge in market volatility. The VIX Index (S&P 500 volatility) jumped 4.1 points this week to 16.52, the largest weekly increase since the March 2023 banking crisis. The volatility measure for the tech sector- the NASDAQ 100 increased by 4.25 to 21.52 – the largest increase since August 2022. Emerging markets performed particularly poorly, with bond yields inching higher and currencies edging lower. Brazilian local bond yields rose 24 bps and the Brazilian Real dropped 3% against the dollar. Trump's beating up of the rest of the world led to commodity prices falling 3.2% on the week. However, we expect some reversal of that sell-off in the coming days.
Gary Dugan - Investment Committee Member
Bill O'Neill - Non-Executive Director & Investor Committee Chairman
22nd July 2024
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