Risk is on at the start of a new trading week. Stocks are higher in Europe, and bond yields have fallen back in the UK and the US, after initially rising. Politics is driving markets once again. Risk sentiment has been buoyed by news that Donald Trump will scale back on his tariff plans once he takes office later this month. Although the President elect will still embark on a universal tariff programme, these will be limited to specific crucial imports.
French luxury companies benefit from Trump’s change of heart on tariffs
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Open account Try demo Download mobile app Download mobile appThis was reported by the US press, and we do not know exactly what these specific crucial imports will be. However, it is still no wonder that investors are taking a sigh of relief, in recent months Trump has touted universal tariffs of 10-20% and up to 60% for China. The French stock market has seen an immediate reaction to this news. The Cac is higher by nearly 2% on Monday, and it is being led higher by Hermes, LVMH and Kering. A Birkin bag, a bottle of Moet and Gucci shoes are hardly critical imports, which is why the luxury sector is having a strong reaction to this news. The French luxury sector was under intense pressure in 2024. LVMH’s stock price fell by 8% in the past 12 months, while Kering’s share price was lower by 38%. News that the US market, which has taken on more importance since China’s consumer slowdown, is likely to be open for business in 2025 and beyond could see a prolonged period of recovery for these stocks. This is good news for Europe’s Granolas and for Europe’s chances to play catch up with US indices.
The sectors that may still be impacted by tariffs include technology and defense sector imports. Commodities and healthcare imports could also be impacted. China may still be more exposed to Trump’s tariff plans compared to Europe.
The dollar sinks as Trump knocks the Trump trade
The dollar is slipping on Monday and has fallen at its fastest pace since 2023 on the back of the report about tariffs. The euro is playing catch up. It is one of the top performing currencies in the G10 FX space so far, and EURUSD is higher by 1.1%, as the dollar gets sold off on a broad basis. FX is one of the most volatile asset classes on Monday, as the market scales back its long dollar position. A Trump presidency that treads a cautious path when it comes to tariffs is better for the global economy. Since the dollar is a safe haven, a reduced threat of tariffs could see a prolonged sell off in the dollar. However, President elect Trump has been capricious in the past, so headline risk is still a concern for investors even if it appears that Trump has softened his stance on tariffs.
German price data could see ECB rate cut expectations get scaled back
German inflation is also buoying the euro. Inflation for December rose by more than expected. The annual rate rose to 2.6% from 2.2% in November, and the monthly rate rose by 0.4%. Inflation pressures remain in the currency bloc, and the risk is that they continue to grow since there are signs that the economy is ticking higher. In Germany, the service sector PMI was stronger than expected, even if the composite PMI is still in negative territory. The overall Eurozone composite PMI was also stronger than expected at 49.6 vs. 49.5. If the growth impulse can be kept up, then the Eurozone composite PMI could be on track to return to expansionary territory later this month.
On the back of the German inflation data, there has been a slight recalibration in ECB rate cut expectations for this year. The prospect of a rate cut in January has been scaled back, and the market now expects interest rates to be 1.92% in December, on Friday that was 1.89%. If this continues, then we could see a floor for rate cut expectations in 2025 at 2%.
The AI trade is back on
After a shaky start, risk is back on at the start of this week. The market is also reverting to its old favourites, Nvidia is one of the top performers in the pre-market and its stock is higher by more than 2% on Monday. Tech stocks are leading the rally once more, after Microsoft said that it would commit $80bn in capex to build AI data centres this year. The recent sell off in tech stocks has also removed some of the froth in the market that built up last year, which may also entice investors who want a slice of the action at a cheaper price.
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