US Dollar
Europe is about to become President Trump’s next target. The good news: a US/EU trade war will be short as common ground to achieve a deal exists. The bad news: European assets remain at the mercy of heightened uncertainty. How should investors position themselves in this tricky context?
This is a follow-up report on Bessenomics – the policy mix that US Treasury Secretary Scott Bessent plans to pursue. The direction of US and global financial markets depends on the amount of fiscal tightening required to bring down US interest rates. Can the Trump administration cut fiscal spending just enough to bring down US bond yields but not cause a recession?
Markets and forecasters anticipate a “Golden Age” for Trump’s America, with US growth expectations soaring while the rest of the world lags. However, this extreme optimism means that there is a lot of room for disappointment. Cooling income growth, weak housing and less deficit spending than expected will result in US growth underperforming expectations. Maintain a modest underweight to equities and modest overweight to fixed income. US markets have become more expensive relative to the rest of the world even as quality differentials have stabilized. Prepare to downgrade US equities to underweight and to upgrade Euro Area and China to overweight. We will wait to pull the trigger until we have more clarity on trade policy and when the dollar's momentum turns negative.
Jonathan provides an update on Canada following strong performance from Canadian stocks last year. On a tactical basis, underweight Canada versus global ex-US on the expectation of tariffs targeting Canada and Mexico. Following a sell off, or if a trade war is avoided, investors should place Canadian stocks on upgrade watch with the goal of moving to a modest overweight versus global ex-US.
Global risk assets are engulfed in a wave of euphoria, which is pulling Europe higher along the way. However, risks still abound. How should investors adjust their allocation to Europe under these highly uncertain conditions?
There is no better way to gauge the macro policies of the new US administration than being privy to President Donald Trump’s discussions with the new Treasury Secretary, Scott Bessent. While we do not have inside information, we have put the pieces of the puzzle together to help clients see the big picture. This report presents our take on a hypothetical conversation between President Trump and Scott Bessent that led to the latter’s appointment as Treasury secretary.
Every year we highlight five low-odds scenarios that would have a major impact on global financial markets if they happened. This year we contemplate a total reversal of Chinese policy, a US-Iran nuclear deal, a breakdown of NATO, US military action across the Americas, and an internationally coordinated FX intervention.
Paradoxically, raging optimism on the US economy is making a reacceleration in growth less likely in 2025. The reaction of the bond market has made the Fed rethink its cutting campaign. Markets are also constraining Trump’s agenda. US manufacturing will not recover with a surging dollar. Fears of inflation and debt sustainability have made moderate House Republicans push back against the President Elect’s wishes. Given the sky-high optimism embedded in asset prices, we believe a defensive portfolio stance is warranted on a 12-month horizon. Overweight gold to hedge the risk of a fiscal crisis.
