Global yield fever cools, but EM conditions tighten

Investors in Asia approach the end of a bumpy week hoping that the relative calm that descended on the dollar and a shortened US bond market session on Thursday can extend into the local session on Friday.

With the December US employment report looming large and markets still feeling the whiplash from the surge in global long-term bond yields this week, trading in Asia may end up fairly range-bound and subdued.

Nikkei futures are pointing to a flat open for Japanese stocks. The Nikkei is on track for a decline of around 0.7% on the week, underperforming the wider MSCI Asia ex-Japan index, which goes into Friday’s session flat on the week.

Chinese stocks are also looking to end the week unchanged and unscathed. That can be interpreted two ways, however. It’s welcome news, given the doom and gloom that continues to surround the outlook for China in the eyes of many investors.

On the other hand, Chinese stocks tumbled more than 5% the week before, their worst week in more than two years. In that light, failure to stage even a modest rebound the following week is a pretty ominous sign.

It’s been a difficult start to the year for China bulls. Stocks are significantly lagging their regional and global peers, the bond yield collapse has been alarming, and uncertainty around a possible trade war with the US is cutting deep.

According to Goldman Sachs, financial conditions in China are the tightest since last April. Across emerging markets more broadly they are the tightest since November 2023.

China’s latest inflation figures on Thursday weren’t particularly encouraging either. Consumer and producer prices for December were broadly in line with forecasts, cementing the view that deflationary pressures are not lifting any time soon.

Economists at Barclays slashed their already weak 2025 CPI forecast to 0.4% from 0.8%, and they expect PPI inflation to remain in deflation throughout 2025. That would mark more than three years of falling factory gate prices.

And it could get even worse if the incoming Trump administration in Washington follows through with its aggressive tariff threats.

“We think a new trade war between China and the US would, on balance, have a deflationary effect, given the downward pressure on exports would exacerbate the overcapacity issues in China,” they warned.

The regional calendar is light on Friday, with the latest Japanese household spending figures most likely to move markets. Investors will be looking for early signs that recent wage agreements in Japan – the highest in decades – are beginning to lift consumer spending.

The Bank of Japan said on Thursday that wage hikes are broadening across the country, suggesting that conditions for a near-term interest rate hike may be in place.

Here are key developments that could provide more direction to markets on Friday:

– Japan’s household consumption (November)

– India industrial production (November)

– Malaysia industrial production (November)

(Reporting by Jamie McGeever; Editing by Diane Craft)

Rising Treasury yields caps global stocks; traders weigh tariffs, Fed rate cuts

NEW YORK/LONDON – A selloff in global bonds continued on Wednesday, pressuring Wall Street stocks and boosting the dollar as signs of continuing strength in the US economy dimmed expectations for aggressive near-term interest rate cuts.

The benchmark 10-year US Treasury yield rose as high as 4.73%, a peak since April 2024, building on Tuesday’s 7 basis point rise. It was last up 0.2 basis points to 4.687%.

On Wall Street, benchmark S&P 500 traded lower for much of the session but finished higher. The Dow also closed higher, while the Nasdaq ended lower. Stocks in healthcare, materials, consumer staples, real estate, and industrials drove gains. Communication services and energy were the biggest losers.

The selloff in bonds on Wednesday accelerated after a CNN report that US President-elect Donald Trump is considering declaring a national economic emergency to provide legal justification for a series of universal tariffs on allies and adversaries.

“Ever since Trump became president-elect, rates just keep going higher,” said Bill Strazzullo, chief market strategist at Bell Curve Trading in Boston. “The issue that got him in the White House is inflation and when you look at all his policies, whether it’s the tariffs, tax cuts or deportations, they are all inflationary.”

The Dow Jones Industrial Average rose 0.25% to 42,635.20, the S&P 500 rose 0.16% to 5,918.25 and the Nasdaq Composite fell 0.06% to 19,478.88.

European shares dipped, with the pan-European STOXX 600 finishing down 0.2%, with most regional bourses also in the red. MSCI’s gauge of stocks across the globe fell 0.12% to 845.95.

European government bond yields surged, with those on German benchmark 10-year notes hitting their highest in about six months. The British 10-year gilt yield rose over 11 basis points to 4.82%, the highest since 2008.

Strong US economic data have weighed on US Treasuries in recent weeks, with investors scaling back expectations for Federal Reserve rate cuts.

Markets are only fully pricing in one 25-basis-point rate cut in 2025, and see around a 60% chance of a second.

Investors will watch Friday’s more comprehensive non-farm payrolls data after data on Wednesday showed a lower than expected increase in private payrolls and jobless claims.

“One thing I’m worried about is, this bonfire of yields going higher tends to reinforce each other, particularly at times like this,” said Michael Purves, CEO and founder of Tallbacken Capital Advisors. “I’m concerned about is if you can buy a 10-year Treasury at 5% with zero risk and that’s a higher yield than on the S&P 500 that’s going to beg a lot of asset allocation questions.”

The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, rose 0.29% to 109.02, with the euro down 0.23% at USD 1.0315.

Oil prices were pressured by a stronger dollar and large builds in US fuel inventories last week. Brent crude settled down 89 cents, or 1.16%, to USD 76.23 a barrel. US West Texas Intermediate crude fell 93 cents, or 1.25%, to USD 73.32.

Gold prices advanced. Spot gold rose 0.51% to USD 2,662.90 an ounce. US gold futures settled 0.3% higher at USD 2,672.40.

“Going into this first quarter that we’re in right now, aside from earnings, I think a big risk for equities is if bond yields do get to 5%,” said Mark Malek, chief investment officer at SiebertNXT in New York. “Buyers are going to be a little bit more reticent. So the people that were powering the market higher, the bid is going to weaken.”

(Reporting by Chibuike Oguh in New York; Additional reporting by Ankur Bannerjee in Singapore and Harry Robertson in London, and David Gaffen in New York. Editing by Mark Potter, David Gregorio, and Diane Craft)

10-year yields hit highest since April on inflation fears

NEW YORK – Benchmark 10-year yields hit a more than eight-month high on Wednesday on concerns that policies introduced by the Donald Trump administration could reignite inflation in addition to boosting growth, leading to fewer Federal Reserve rate cuts.

A CNN report that Trump is considering declaring a national economic emergency to provide legal justification for a series of universal tariffs on allies and adversaries added to concerns about rising price pressures on Wednesday.

“With the new administration coming in, there is some potential fear of that typical Q1 upturn in inflation,” said Michael Lorizio, head of US rates trading at Manulife Investment Management.

Under Trump, there are also considerable uncertainties over what policies exactly will be implemented by the new government and what economic impact they will have, which is making investors wary of buying longer-dated debt, said Lorizio.

“When the range of potential outcomes widens in the US economy that’s when duration really suffers and you begin to see some apprehension in terms of buying interest further out the curve.”

Interest rate-sensitive two-year note yields were last down 1 basis point on the day at 4.285%.

Benchmark 10-year yields rose 0.8 basis points to 4.693% and peaked at 4.73%, the highest since April 25.

The yield curve between two-year and 10-year notes steepened one basis point to 40.2 basis points and earlier reached 42.9 basis points, the steepest since May 2022.

Thirty-year Treasury yields rose 2.1 basis points to 4.933% and reached 4.968%, the highest since Nov. 2023.

Minutes from the Fed’s December meeting released on Wednesday showed that Fed officials agreed that inflation is likely to continue to slow this year, but also saw a rising risk that price pressures may remain sticky as policymakers began wrestling with the impact of policies expected from the incoming Trump administration.

Fed Governor Christopher Waller said on Wednesday that inflation should continue falling in 2025 and allow the US Federal Reserve to further reduce interest rates, though
at an uncertain pace.

Data on Wednesday showed that the number of Americans filing new applications for unemployment benefits unexpectedly fell last week.

The ADP National Employment Report showed that employers added 122,000 jobs last month.

The US government’s jobs report on Friday is expected to show that employers added 160,000 jobs in December.

The Treasury Department saw good demand for a USD 22 billion auction of 30-year bonds on Wednesday, the final sale of USD 119 billion in coupon-bearing debt issuance this week.

The bonds sold at a high yield of 4.913%, around a basis point below where they had traded before the sale. Demand was 2.52 times the amount of debt on offer, the highest since November.

The US government saw average interest for a USD 39 billion auction of 10-year notes on Tuesday and soft demand for a USD 58 billion sale of three-year notes on Monday.

(Reporting By Karen Brettell; Editing by Tomasz Janowski and Nick Zieminski)

Oil prices down on US fuel stocks build, dollar strength

NEW YORK – Oil prices fell more than 1% on Wednesday as a stronger dollar and large builds in US fuel inventories last week pressured prices, reversing earlier gains driven by tightening supplies from Russia and other OPEC members.

Brent crude settled down 89 cents, or 1.16%, to USD 76.23 a barrel. US West Texas Intermediate crude fell 93 cents, or 1.25%, to USD 73.32.

Both benchmarks had risen more than 1% earlier in the session.

“The oil market is being weighed down by the significant increases in gasoline and diesel inventories that we’ve seen over the last couple of weeks,” said Andrew Lipow, president of Lipow Oil Associates. Fuel inventories swelled as refiners continued ramping up production, he added.

Gasoline stocks rose by 6.3 million barrels last week to 237.7 million barrels, compared with analysts’ expectations in a Reuters poll for a 1.5 million-barrel build, according to data released on Wednesday from the US Energy Information Administration.

Distillate stockpiles rose by 6.1 million barrels in the week to 128.9 million barrels, versus expectations for a 600,000-barrel rise.

“I would be concerned if we saw more substantial products builds over the next few weeks. And in the meantime, the cold snap could constrain crude oil supply and increase heating oil demand,” said Josh Young, chief investment officer at Bison Interests.

Crude inventories fell by 959,000 barrels to 414.6 million barrels in the week, compared with analysts’ expectations for a 184,000-barrel draw.

A stronger dollar also pressured prices by making oil more expensive for holders of other currencies.

Limiting the losses, oil output from the Organization of the Petroleum Exporting Countries fell in December after two months of increases as field maintenance in the United Arab Emirates offset a Nigerian output hike and gains elsewhere in the group.

In Russia, oil output averaged 8.971 million barrels a day in December, below the country’s target, Bloomberg reported, citing the energy ministry.

Analysts expect oil prices to be down on average this year from 2024 due in part to production increases from non-OPEC countries.

“We are holding to our forecast for Brent crude to average USD 76/bbl in 2025, down from an average of USD 80/bbl in 2024,” BMI, a division of Fitch Group, said in a client note.

(Reporting by Nicole Jao in New York, Katya Golubkova in Tokyo, Jeslyn Lerh in Singapore, and Arunima Kumar in Bengaluru; Editing by Elaine Hardcastle, Nick Zieminski, and Nia Williams)

Beaten-down European stocks lure investors back as Trump trades wobble

LONDON – Beaten-down European stocks are luring investors back after a record underperformance versus Wall Street in 2024, as fears about US economic shocks under incoming President Donald Trump boost the appeal of international markets.

Amundi, Europe’s largest investor, said on Wednesday it had “turned constructive on Europe” because the effect of trade war fears on valuations was exaggerated.

Funds that invest in European equities have also just recorded their first weekly net inflow since October, Lipper data showed, after several big banks this week tipped the market for a 2025 turnaround.

The STOXX 600 index of blue-chip European shares has lost 0.7% this month but outperformed the US S&P 500 .SPX, which has dropped nearly 3% on fading hopes for US interest rate cuts and policy uncertainty.

Barclays on Wednesday said the European market’s “risk-reward” profile was improving, citing “emerging anxiety around Trumponomics”.

Deutsche Bank and Citi this week forecast double-digit returns for the STOXX this year, while Goldman Sachs said the market’s lowly-valued companies were likely takeover targets.

The STOXX 600 ended 2024 at its biggest discount to the S&P on record, LSEG data showed, as investors flocked to so-called “Trump trades” that bet his policies will lift most US assets.

“There’s room to take the other side of that trade and one of the main beneficiaries will be international markets,” Baird strategist Ross Mayfield said, arguing policy shocks would weaken the dollar and boost US investors’ interest in euro-denominated assets.

Investors are growing increasingly concerned about tariffs refueling US inflation and prompting the Federal Reserve to hike rates, Bank of America said following its most recent survey of global fund managers.

Conflicting reports about Trump’s tariff plans drove the US currency sharply lower on Monday and left investors braced for more US market swings.

“I’ve moved from really disliking international markets to saying I think there is a diversification benefit,” Raymond James Investment Management chief market strategist Matt Orton said.

Cheaply-valued European banks, he said, were now “very attractive”, while he also favoured the region’s aerospace and defence stocks.

The revival in interest in European stocks follows months of gloom as French and German politics plunged into chaos and tariff threats pressure eurozone exporters.

The eurozone economy remains weak, but after four European Central Bank rate cuts last year a long-term decline in eurozone business activity has eased.

“We should have (had) the trough in the eurozone,” Edmond de Rothschild Asset Management portfolio manager Marie de Leyssac said.

A European market rebound in 2025 was likely given last year’s “extreme underperformance”, she added.

Janus Henderson multi-asset fund manager Oliver Blackbourn said he was not yet buying into European stocks, but had also become nervous about heady Wall Street valuations.

“If we do see more improvements in European economic data then we’d get more positive pretty quickly,” he said

(Reporting by Naomi Rovnick in London. Additional reporting by Siddarth S. in Bengaluru. Editing by Mark Potter)

Treasury yield surge reflects expectations of more long-term debt

NEW YORK – Longer-term US Treasury yields have surged to multi-month highs, outpacing a rise in shorter-dated yields, with some of the disparity reflecting anticipation that the incoming Trump administration will need to change the current focus on relying more on short-term debt, traders say.

President Joe Biden’s Treasury Secretary Janet Yellen has increased sales of Treasury bills, debt maturing in one year or less, which have seen strong demand from money market investors.

But that has taken the portion of bills above the recommended levels for the overall debt outstanding, a process that will likely need to be addressed by President-elect Donald Trump’s nominee for Treasury chief Scott Bessent.

“The market is building more term premium into the long end to account for the fiscal situation, the deficit, and potentially a lot more issuance in the long end of the curve as they unwind the Yellen policy,” said Dan Mulholland, head of rates – trading and sales at Crews & Associates.

Ten-year yields were below those on two-year notes until around September and have been rising at a faster pace since June. Ten-year yields reached 4.73% on Wednesday, the highest since April, while two-year yields have held relatively steady at 4.27%.

Traders say that abundant supply of short-term debt was a factor keeping the US Treasury yield curve inverted for longer than is usual, from around July 2022 to September, which is now being reversed.

“That kept the yield curve inverted, and now I think there’s a feeling that that’s not the way to do it,” said Tom di Galoma, head of fixed income trading at Curvature Securities.

An expected increase in longer-dated debt is not the only factor pushing yields higher. Trump’s policies are expected to boost growth and potentially inflation, both of which will lead to higher interest rates.

The Treasury often uses sales of short-term debt as a kind of shock absorber that it can increase or decrease when it faces large swings in its borrowing needs. But longer-term, market observers say it’s unwise to rely too much on short-term debt, as it increases refinancing risks if market conditions turn.

Outstanding Treasury debt has surged to USD 36 trillion from USD 23 trillion in late 2019 as the government relies more on debt to finance spending and plug its budget deficit, which analysts expect will continue to worsen for the foreseeable future.

Treasury bills now account for 22% of debt, above the 15-20% recommendation by the Treasury Borrowing Advisory Committee.

They reached 25% in 2020 as the government ramped up spending related to COVID-related business closures. They then fell back to around 15% in 2022 but have taken a larger share of overall debt issuance since.

While the Treasury is not expected to immediately increase its longer-dated debt auctions, market participants have begun pricing for the likely eventuality and will watch the US government’s quarterly refunding announcements for signals on when it will likely begin.

“Trump’s Treasury Secretary is not going to cause disruption in the market by suddenly changing the auction sizes, but it could be that in late April, early May, that we start to see announcements for higher coupon auction sizes,” said Will Compernolle, macro strategist at FHN Financial. He added that increases in longer-dated debt may begin in the summer.

(Reporting By Karen Brettell; editing by Alden Bentley and Mark Heinrich)

China inflation lands amid global bond turmoil

China’s latest inflation figures are out on Thursday, and they could not be coming at a more fascinating – some might say alarming – time for global bond markets.

Long-term yields around the world are shooting higher as investors bet that sticky inflation will force the US Federal Reserve and other central banks to dial down or even halt their rate-cutting cycles.

The 30-year UK gilt yield is the highest since 1998, the 30-year US Treasury yield is a whisker from 5%, and the US ‘term premium’ – the risk premium investors demand for lending long to Uncle Sam rather than rolling over shorter-term debt – is the highest in a decade.

If this is a reflection of investors’ fears that the inflation genie has not been put back in the bottle and central banks are losing control over the long end of the bond curve, policymakers should be worried.

Fed Governor Christopher Waller seems relatively relaxed though, saying on Wednesday he still thinks inflation will fall toward the Fed’s 2% target, allowing for further rate cuts. But minutes of the Fed’s policy meeting last month showed policymakers are wary, particularly around the impact of policies expected from the incoming Trump administration.

Money markets are pricing in only 40 basis points of Fed easing this year, and the year-on-year oil price rise is the highest in six months. Investors’ inflation fears are bubbling up.

The global outlier is China, where policymakers are fighting deflation. As Jim Bianco at Bianco Research points out, it is the only major bond market in the world where yields are falling.

Annual producer inflation has been negative every month since October 2022, indicating that price pressures across the economy remain deflationary. Annual consumer inflation is close to zero, and hasn’t been above 1% for nearly two years.

China’s producer and consumer price inflation figures for December will be released on Thursday. According to the consensus forecasts in Reuters polls, economists expect annual PPI inflation shifted slightly to -2.4% from -2.5% in November, while annual CPI inflation cooled to just 0.1% from 0.2%.

This is the context in which Chinese bond yields are tumbling to their lowest-ever levels. The 30-year yield is already below the 30-year Japanese Government Bond yield, and the 10-year yield is now less than 50 basis points away from going below its 10-year JGB equivalent.

HSBC analysts on Wednesday slashed their year-end 10-year Chinese yield forecast to 1.2% from 1.8%.

The yuan remains under heavy selling pressure and on Wednesday slipped to a fresh 16-month low. It is now poised to break the September 2023 low of 7.35 per dollar, a move that will take it to levels last seen in 2007.

Here are key developments that could provide more direction to markets on Thursday:

– China PPI, CPI inflation (December)

– Australia retail sales (November)

– Taiwan, Australia, Philippines trade (December)

(Reporting by Jamie McGeever; Editing by Bill Berkrot)

US yields rise on strong data amid supply

NEW YORK – Benchmark 10-year Treasury yields hit an eight-month high on Tuesday after better-than-expected data pointed to a strong economy and as the Treasury auctioned USD 39 billion of the notes to average demand.

US job openings in November grew to 8.098 million, exceeding forecasts for a 7.7 million rise, and higher than October’s numbers of 7.839 million.

US services sector activity also accelerated in December, while a surge in a measure of prices paid for inputs to near a two-year high pointed to elevated inflation.

“It’s giving the impression that the economy is re-accelerating,” said Gennadiy Goldberg, head of US rates strategy at TD Securities in New York.

Goldberg said positive seasonality could be helping the data appear stronger than it is. “But optically speaking, that’s what’s really driving Treasuries here – that expectation that maybe things are actually getting a lot better,” he said.

Friday’s employment report for December will next be watched for clues on the strength of the labor market. It is expected to show that employers added 160,000 jobs during the month.

Interest rate-sensitive two-year note yields were last up 2.7 basis points on the day at 4.297%.

Benchmark 10-year yields rose 7.1 basis points to 4.687% and peaked at 4.699%, the highest since April 26.

The yield curve between two-year and 10-year notes steepened four basis points to 39.3 basis points, the steepest since May 2022.

Thirty-year Treasury yields rose 7.5 basis points to 4.913% and reached 4.926%, the highest since Nov. 2023.

The Treasury saw okay interest for its 10-year auction, which may have been helped by Tuesday’s sharp rise in yields.

The debt sold at high yield of 4.680%, close to where it had traded before the sale. Demand was 2.53 times the amount of debt on offer.

The US government saw soft demand for a USD 58 billion sale of three-year notes on Monday and will also sell USD 22 billion in 30-year bonds on Wednesday.

Heavy corporate debt issuance is also seen weighing on the market this week.

Treasury yields have increased despite the Federal Reserve cutting interest rates by 100 basis points since September. The US central bank is expected to be more cautious in making further rate reductions this year as long as inflation stays above the Fed’s 2% annual target.

“The market is really pricing for a higher terminal rate…right around 4% is where we’re at right now and that’s only 25 basis points from where the funds rate is now,” said Dan Mulholland, head of rates – trading and sales at Crews & Associates in New York.

Analysts expect policies, including tax cuts and looser business regulations introduced by Trump and the Republican-led Congress, will boost growth, while others, including a clampdown on illegal immigration and tariffs, could add to inflation.

Concerns over the longer-term fiscal trajectory are also leading longer-term US Treasury yields higher, with the US budget deficit expected to continue to worsen.

“The market is building more term premium into the long end to account for the fiscal situation, the deficit, and potentially a lot more issuance in the long end of the curve,” Mulholland said.

(Reporting by Karen Brettell; Editing by Jan Harvey, Barbara Lewis, and Nick Zieminski)

Fitch warns of US debt-ceiling stalemate despite Republican-controlled government

NEW YORK – A unified government under President-elect Donald Trump is unlikely to lead to a quick resolution of the US debt-ceiling debate given a narrow Republican House majority and continued disagreements within the party on spending policies, said ratings agency Fitch.

As part of a 2023 budget agreement, Congress temporarily lifted the debt ceiling until Jan. 1, 2025. While the US Treasury can continue covering its obligations for several more months, Congress must revisit the issue this year to avoid a debt default.

Fitch, which downgraded the US government credit profile in 2023 after a debt-ceiling crisis, said on Tuesday it was skeptical that a debt-limit suspension or increase, as well as other key fiscal policy decisions expected this year, will be implemented quickly.

“The US faces significant fiscal policy challenges in 2025 … We believe it is unlikely that these will be resolved expeditiously because of long-standing weaknesses in the federal government’s budgetary process and a narrow Republican House majority,” it said in a statement.

Hopes that one-party control of government could make it easier to agree on raising the debt ceiling were dented last month when Congress passed spending legislation in a down-to-the-wire vote that averted a destabilizing government shutdown. Several Republicans rejected Trump’s demand to use the bill to lift the nation’s debt ceiling.

The last-minute resolution was consistent with the ratings agency’s expectations that Congress would rely on temporary funding measures, and demonstrated “the potential obstacles to securing agreements on fiscal measures, both within Congress and between Congress and the President,” Fitch said.

The cost of insuring exposure to US government debt has started to climb this week, with spreads on US six-month and one-year credit default swaps – market-based gauges of the risk of default – widening by three and four basis points, respectively, compared to last week, S&P Global Market Intelligence data showed on Tuesday.

The 2023 debt-ceiling showdown spurred a selloff in stocks and bonds, pushed the US to the brink of default, and hurt the country’s credit rating.

Fitch said it expects US policymakers to eventually reach an agreement on the debt ceiling as well as on other key fiscal policy items, such as the extension of 2017 tax cuts set to expire this year.

But a still-challenging political environment means decisions are likely to be reached on an issue-by-issue basis, it said, “underscoring the US’ deterioration in governance on fiscal matters over recent years.”

(Reporting by Davide Barbuscia; Editing by Rod Nickel)

Trump trade uncertainty exposes stretched markets to volatility shocks: McGeever

ORLANDO, Florida – US financial markets last year were more sensitive to economic surprises than usual, and as Donald Trump prepares to begin his second term as US president investors should buckle up for more of the same in 2025.

Especially in Treasuries.

The 10-year yield’s sensitivity to inflation and activity data surprises last year was the highest in more than 20 years, according to Goldman Sachs. Although inflation has fallen, growth fears have ebbed, and the Federal Reserve has started cutting interest rates, these sensitivities persist.

Again, especially in Treasuries.

While equities’ sensitivity to inflation surprises has fallen as price pressures have cooled, it remains high by historical standards. And stocks’ sensitivity to growth surprises, though still modest, has begun to tick up to near pandemic-era levels.

What does this mean for the coming year? While benchmark gauges of implied equity and bond volatility are muted, markets are in a more tenuous position than they were a year ago. By many measures, such as pricing, sentiment and valuations, they are extremely stretched.

US stocks have never been riding higher or represented a bigger share of the global market cap, and the Fed’s 100 basis points of interest rate cuts since September have been met with a counterintuitive 100-basis-point rise in the 10-year Treasury yield.

Does this mean America’s key markets are primed for correction? Maybe. But what’s easier to say with confidence is that we’re going to see wider intra-day trading ranges and short-term reversals as investors contend with the biggest wild card of all: Trump’s agenda.

‘VOLATILITY MAN’

History shows there is a “solid” relationship between macro and market volatility, as Citi’s Stuart Kaiser points out. And with the world still in the dark as to how Trump’s trade and tariff policies will pan out and how the Fed will respond, macro uncertainty is alive and well.

Indeed, the two biggest “tail risks” for world markets cited in Bank of America’s latest fund manager survey were “global trade war triggers recession” and “inflation causes Fed to hike.” Both captured 37% of respondents’ votes, significantly more than the 10% garnered by “geopolitical conflict,” the third most-cited risk.

“With numerous large policy shifts on the horizon, markets should be prepared for a lot more volatility ahead,” Deutsche Bank’s George Saravelos said on Monday.

It is true that the initial year of Trump’s first term, 2017, turned out to be a good one for Wall Street, as the S&P 500 index rose 19%, despite Trump’s unpredictable actions. But that was a period of low inflation, low interest rates, and solid growth. Such low macro volatility is unlikely to be replicated this time. And given the stretched nature of today’s markets, even modest economic surprises could spark big moves.

Just look at the sharp swings in US stocks and the dollar on Monday in response to a media report – later dismissed by Trump – implying that his proposed tariff regime would be less severe than feared.

But even if macro “vol” does increase, will it be enough to puncture the generally bullish 2025 market consensus? Perhaps not, suggests Phil Suttle, a Washington-based economist. “(Markets) will be quite volatile but without much significant net direction, as the perceived odds of these different (tariff) scenarios oscillate,” Suttle wrote on Monday in a note titled “Volatility Man.”

It is also possible that investors will increasingly ignore Trump’s social media posts on markets, economic policy, or the Fed, as they eventually did in his first term, especially if real-world economic indicators remain stable. But it’s far too early for that right now.

Given the combination of stretched markets and an unpredictable commander-in-chief, markets will feature a lot of sound and fury in 2025. It could be a bumpy ride.

(The opinions expressed here are those of the author, a columnist for Reuters.)

(By Jamie McGeever; Editing by Paul Simao)

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