Small-cap stocks face delicate balance between Trump boost and inflation risks

US small-cap stocks have surged to near record highs following Donald Trump’s presidential election win, but some investors are wary of chasing the rally as they fear his policies could drive a resurgence in inflation, hurting the rate-sensitive sector.

The Russell 2000 index has jumped around 6% since the election on Nov. 5, outperforming gains in major indexes on expectations that Trump’s proposals to cut taxes, decrease regulations and increase tariffs would lift domestically focused small caps.

But some analysts and portfolio managers believe the policies could drive up the cost of goods and stoke inflation, derailing the sector’s performance, particularly if renewed inflationary pressure prompts fewer-than-expected Federal Reserve interest rate cuts.

Investors have already dialed back expectations for rate cuts in 2025, and that has pushed Treasury yields to multi-month highs.

“We think (inflation) is probably the biggest under-appreciated risk by markets,” said Sameer Samana, senior global market strategist at Wells Fargo Investment Institute (WFII), who has a neutral rating on small caps.

“Right now, large caps seem higher quality (and have) better earnings growth, it’s just very difficult to drop down to smalls when they don’t have much going for them right now.”

Small-cap companies tend to carry more debt on their balance sheets, which means an increase in interest rates could drive up borrowing costs for them and make servicing their debt more difficult, analysts say.

Jamie Battmer, chief investment officer at Creative Planning, said Trump’s tariffs would force small caps to face a “delicate balancing act.”

The Russell 2000 has gained about 19% in 2024, however, lagging the benchmark S&P 500’s 26% rise and the Nasdaq’s 28% gain.

Despite the index’s underperformance this year, valuations are high. The Russell 2000 is trading at around 28.3 times forward earnings, according to data compiled by LSEG, compared with S&P 500’s 22.7.

“What we are focusing on is earnings and quality – and small caps don’t really fit that,” said Jim Caron, chief investment officer, cross-asset solutions at Morgan Stanley Investment Management.

Ryan Dykmans, chief investment officer at Dunham & Associates Investment Counsel, said that while his firm has been adding to small-cap holdings, it has focused on companies with less debt.

“If rates are going to stay as high as they are today for another year, you’re going to see a lot of small cap companies just burn out,” said Dykmans, suggesting it would be difficult for them to pay down interest on their debt or take out new loans.

Investors seeking to add small caps are better off waiting for dips rather than buying at current levels, WFII’s Samana said.

(Reporting by Lisa Mattackal in Bengaluru; Editing by Shinjini Ganguli)

Red sweep may speed US debt ceiling deal, stoke long-term bond worries

NEW YORK – A unified government under Donald Trump may offer investors reprieve from the bruising battles around the US debt ceiling that have roiled markets in recent years, even as it raises the prospect of unbridled fiscal expansion that could pressure bonds over the longer term.

The President-elect’s Republican Party will control both houses of Congress when he takes office in January, Edison Research projected on Wednesday.

The so-called Red Sweep gives the Trump administration more leeway to push through its economic platform, including tax cuts and tariffs, which could spur growth while juicing inflation and adding to worries over the US budget deficit.

But one-party control of government could also make it easier to come to an agreement on raising the debt ceiling, a cap on borrowing set by the federal government that requires approval by a majority of lawmakers. A debt ceiling showdown last year spurred a sell-off in stocks and bonds, pushed the US to the brink of default and hurt the country’s credit rating.

“It doesn’t solve the fiscal sustainability questions going forward, but if the debt ceiling is less of a concern, it does solve the more near term concerns,” said Jonathan Cohn, head of US rates desk strategy at Nomura Securities International.

Yields on the benchmark 10-year Treasury hit their highest level in over four months on Nov. 6, suggesting investors were positioning for stronger growth but also higher inflation and wider budget deficits following Republicans’ strong showing in the Nov. 5 election. Yields rise when bond prices fall.

At the same time, a market measure of the cost of insuring against a US government debt default dropped sharply after the vote. Spreads on US one-year credit default swaps (CDS) stood at 18 basis points on Wednesday from 49 basis points on Election Day, according to S&P Global Market Intelligence data.

That followed sharp increases ahead of the election suggesting concerns over a US borrowing-limit political dispute next year – one widely expected outcome of a split government.

“The drop in US sovereign CDS certainly reflects the lower risk of a debt ceiling crisis manifesting as a credit event or a default event as long as the same party controls Congress and the Executive,” said Thierry Wizman, global FX and rates strategist at Macquarie Group.

Democratic President Joe Biden and the Republican-controlled House of Representatives reached a debt ceiling agreement last year that lifted the government’s USD 31.4 trillion borrowing limit, ending months of political brinkmanship and averting a historic default by just two days.

The standoff nevertheless earned the US a black eye: rating agency Fitch downgraded the US government’s top credit rating by one notch later in the year and Moody’s followed by changing its outlook on the sovereign to “negative” from “stable,” partly due to political polarization in Congress limiting the government’s ability to reach consensus on fiscal reforms.

The debt ceiling is set to be reinstated on Jan 2. Strategists estimated the Treasury would reach its so-called X-date, when it runs out of funds to meet all of its debt obligations, in the second half of 2025.

Last year’s fireworks are unlikely to repeat this time around as “the most contentious debates have come with a Democrat in the White House and Republican control of the House,” strategists at JPMorgan wrote.

But bond investors might still have their share of worries. Expectations of stronger economic growth and inflation are already pushing many to roll back bets on how deeply the Federal Reserve will cut interest rates next year, weighing on bonds.

A unified government could add to those pressures. Moody’s, the last of the three major rating agencies to maintain a top rating for the US, last week warned the country’s fiscal health is at higher risk.

Deficit growth could eventually lead investors to demand a higher premium for holding US debt, wrote Naomi Fink, chief global strategist at Nikko Asset Management.

“The bond market may experience potential disruptions if external investors demand a higher premium to finance US external deficits,” she said.

(Reporting by Davide Barbuscia; Editing by Ira Iosebashvili and Jamie Freed)

US monetary policy still restrictive, two Fed officials say

The Federal Reserve’s policy rate continues to act as a brake on the resilient labor market and on inflation that is still above the 2% target, two US central bankers said on Tuesday, a view that appears to argue for more interest rate cuts, even as both signaled they were not ready to judge how fast or by how much.

“In my judgment we are still in a modestly contractionary stance, but ultimately the economy will guide us, in terms of how far we are needing to go” in cutting the Fed’s benchmark for short-term borrowing costs, Minneapolis Fed President Neel Kashkari said at a Yahoo Finance event.

Speaking earlier, Richmond Fed President Thomas Barkin called the current level of rates “somewhat less restrictive” than it had been, and said he could see scenarios where demand rises and the central bank needs to focus on containing inflation, and others where businesses start laying off workers and it needs to turn more to protecting the job market.

“With the economy now in a good place and interest rates off their recent peak but also off their historic lows, the Fed is in position to respond appropriately regardless of how the economy evolves,” Barkin said at an event in Baltimore.

The Fed cut its policy rate last week by a quarter of a percentage point to the 4.50%-4.75% range. Short-term borrowing costs are now 75 basis points below where they were two months ago, just before the central bank started reducing rates to bring them more in line with falling inflation and what appeared to be a quickly cooling labor market.

In September, Fed policymaker projections were consistent with another quarter-percentage-point rate cut in December, and four more like-sized reductions next year, bringing the policy rate to the 3.25%-3.50% range.

Since then, a lot has happened that could complicate the central bank’s next steps.

Inflation by the Fed’s targeted measure was 2.1% in September, just above its target, but measures of underlying inflation that strip out volatile energy and food prices have been stuck higher, with little sign of recent progress. Economists expect more of the same when the US Labor Department releases the consumer price index for October on Wednesday.

Monthly job gains have dropped, but unemployment, at 4.1%, is low by historical standards. Policymakers are watching for signs of further weakening – which would suggest the need for more rate cuts – or of continued resilience, and they will get just one more monthly employment report before their Dec. 17-18 meeting.

New administration

Republican President-elect Donald Trump’s victory in last week’s election also creates fresh uncertainty. Trump, who will take over from Democratic President Joe Biden in January, has promised to cut taxes, impose new tariffs on imports, and deport a record number of immigrants. While financial markets have generally moved to price in faster economic growth and fewer interest rate cuts as a result, central bankers say they can’t plan a response until it’s clear exactly what policies will be enacted.

Asked what could prompt the Fed to pause rate cuts at the December meeting, Kashkari said he feels there is too little time between now and then for the data to show a reheating of the labor market.

“I think there’d have to be a surprise on the inflation front to change the outlook so dramatically,” Kashkari said. “The bigger question long run is where are we going to settle?”

Kashkari said he believes the level of borrowing costs that neither stimulates nor restricts the economy – the so-called neutral rate – is likely higher than in the past, perhaps because productivity has increased.

Although a higher neutral rate could be one argument for fewer rate cuts ahead, Kashkari steered clear of making predictions, as did Barkin.

“I think we all agree we are above neutral now,” Kashkari said. “But over the course of the next year, we’re going to get a lot more information about where neutral is.”

(Reporting by Ann Saphir; Editing by Paul Simao)

Trump bets cashed in before US CPI

A look at the day ahead in Asian markets.

Investors sobered up from post-election euphoria over Republican Donald Trump’s victory and took some profits ahead of Wednesday’s October US CPI report, which kicks off a calendar thick with US news events markets will be watching the rest of the week.

While CPI will not be a trading factor for Asia until Thursday, it has ramifications for global markets already nervous about how Trump’s hardline trade policies might impact US growth, inflation, interest rates and thereby the Federal Reserve’s easing trajectory.

U.S. stocks eased and bitcoin faltered after flirting with USD 90,000 on Tuesday while Treasury yields jumped on reopening from a long weekend as the ramifications of tax cuts, trade tariffs and wider budget deficits under the new administration were priced in.

Wall Street’s stumble was similar to downward moves in Asia, in what looks like a negative feedback loop.

Trump’s agenda should be easily pushed through Congress, now that Republicans appear to have won a majority of US House seats, marking a government sweep.

The S&P 500 and other indexes spent the day in the red. Bitcoin pulled back during the session before making another run that barely cleared the early high at USD 89,982.

Crypto stocks like Coinbase and Riot Platforms slumped, as did Tesla, another stock expected to perform well during Trump’s presidency, given the close ties between the president-elect and Elon Musk, its billionaire CEO and another outspoken bitcoin promoter.

The ten-year yield posted its biggest basis point rise since June and the yield on the two-year note looked set for its biggest jump in more than a month — excellent support for the dollar. Dollar/yen hit its highest since July 30, trading at 154.73 in late US trade and China’s yuan was at 7.2423 per dollar after hitting its lowest since Aug 1.

Chinese shares slid on concerns that Trump’s administration would be loaded with China hawks. The Shanghai Composite closed 1.4% lower. MSCI’s all world index fell 0.7%, after its index of Asian shares ex-Japan ended down 2% along with the Nikkei’s drop.

Datawise, US October producer prices on Thursday and retail sales on Friday fill out the week. Fed Chair Jerome Powell speaks on the economic outlook on Thursday, another reason to keep the powder dry.

Oil falls on Chinese stimulus disappointment, supply outlook

HOUSTON – Oil prices fell by more than 2% on Monday after China’s latest stimulus plan disappointed investors seeking demand growth in the world’s second-biggest oil consumer, while supply looked set to rise in 2025.

Brent crude futures settled at USD 71.83 a barrel, down USD 2.04 or 2.76%. US West Texas Intermediate crude futures finished at USD 68.04 a barrel, down USD 2.34, or 3.32%.

Both benchmarks fell more than 2% on Friday.

Donald Trump’s US election victory may continue to affect the market, said Phil Flynn, senior analyst for the Price Futures Group.

“The election with Trump’s promise to ‘drill, baby, drill’ has taken away some incentive to go long,” Flynn said.

The US dollar index, a measure of its value relative to a basket of foreign currencies, slightly overshot the highs seen right after last week’s US presidential election, with markets still waiting for clarity about future US policy.

A stronger dollar makes commodities denominated in the US currency, such as oil, more expensive for holders of other currencies and tends to weigh on prices.

In China, consumer prices rose at the slowest pace in four months in October while producer price deflation deepened, data showed on Saturday, even as Beijing doubled down on stimulus to support the sputtering economy.

“Chinese inflation figures were again weak, with the market fearing deflation, particularly as the yearly change in the producer price index fell further into negative territory … Chinese economic momentum remains negative,” said Achilleas Georgolopoulos, a market analyst at brokerage XM.

Bank of America Securities said in a note on Monday that non-OPEC crude supply was expected to grow by 1.4 million barrels per day (bpd) in 2025 and 900,000 bpd in 2026.

“Meaningful non-OPEC growth next year and an unconvincing Chinese stimulus package likely mean inventories will swell even without OPEC+ increases,” Bank of America noted.

In late September, OPEC+ said it would boost supply in December by 180,000 bpd, but earlier this month an agreement was reached among the member and allied countries to postpone the supply expansion until January.

The US offshore production regulator said 25.7% of crude oil production and 13% natural gas output remains shut because of Hurricane Rafael, which by Monday broke apart and was only a remnant storm in the central Gulf of Mexico.

(Reporting by Erwin Seba in Houston; Additional reporting by Arunima Kumar in Bengaluru, Robert Harvey in London, and Florence Tan in Singapore; Editing by Louise Heavens, Paul Simao, Susan Fenton, Christina Fincher, and Cynthia Osterman)

Dow Jones Industrial Average notches record high close

The Dow Jones Industrial Average notched a record high close on Monday, lifted by bank stocks that benefited from optimism about Republican President-elect Donald Trump’s expected fiscal policies.

Tesla’s stock market value surged to USD 1.1 trillion, fueled by bets that automakers would benefit from CEO Elon Musk’s close ties to Trump. Several other stocks also added to gains they have made since Trump won the election, as traders expect them to benefit from his return to the White House.

The S&P 500 financial index rallied, with banks helping lift the Dow to its highest ever.

The small-cap Russell 2000 jumped to its highest since November 2021. Smaller companies are viewed as potential beneficiaries of Trump’s proposed tax cuts and expected looser regulations.

Microsoft, Amazon, and Meta Platforms each dipped.

The S&P 500 has rallied almost 4% since Trump’s victory last Tuesday, while the Nasdaq has gained almost 5%.

The S&P 500 information technology index and the PHLX chip index both retreated, with AI heavyweight Nvidia giving back recent gains.

“It’s been a wild four days since the election and the market is taking a breath,” said Jake Dollarhide, chief executive officer of Longbow Asset Management in Tulsa, Oklahoma. “But the trend is moving higher. I would not be surprised if the Trump rally bleeds into a Santa Claus rally.”

According to preliminary data, the S&P 500 gained 8.04 points, or 0.13%, to end at 6,003.58 points, while the Nasdaq Composite gained 16.07 points, or 0.08%, to 19,302.85. The Dow Jones Industrial Average rose 316.26 points, or 0.72%, to 44,305.25.

Crypto stocks rallied as bitcoin soared to a record USD 87,000. Coinbase Global jumped and bitcoin miners MARA Holdings and Riot Platforms also rallied.

Investors are watching consumer price inflation data, due Wednesday, and a raft of other key data this week for signals on the economy and monetary policy outlook.

The US Federal Reserve cut interest rates by 25 basis points last week, and interest rate futures imply traders see a 65% chance of another 25 basis point cut at the central bank’s December meeting, according to CME FedWatch.

“With policymakers already so cautious about the risk of renewed price pressures, particularly amid the continued strength of the US economy, the Fed will need to tread a cautious path,” warned Seema Shah, chief global strategist at Principal Asset Management.

(Reporting by Lisa Pauline Mattackal and Purvi Agarwal in Bengaluru and by Noel Randewich in Oakland, Calif.; Editing by Shounak Dasgupta and David Gregorio)

Gold drops over 2% as dollar strengthens; investors await Fed policy cues

Gold prices slipped more than 2% on Monday, weighed down by the greenback’s continued rise and broader implications of Donald Trump’s victory in the US presidential election on fiscal policy and interest rate cuts.

Spot gold fell 2.5% to USD 2,617.96 per ounce, as of 1:54 p.m. ET (1854 GMT). US gold futures settled 2.9% lower at USD 2,617.70.

With the dollar index rising 0.5% to its highest level since early July, gold became less attractive to non-dollar buyers. Last week, the index surged more than 1.5% to 105.44 following the announcement of Trump’s victory.

“The market’s attention has focused to the second-order effect since the red wave,” said Daniel Ghali, commodity strategist at TD Securities.

“The likelihood of tariffs being imposed relatively early on into Trump’s presidency and the resulting strong demand for dollar that is creating. Stronger dollar is weighing on gold prices for the first time in months because it’s also associated with increasing odds that the Federal Reserve might delay its easing cycle.”

Bullion logged its worst week in over five months following Trump’s election last Tuesday to a second four-year term. His victory poses new uncertainties for the US central bank as it continues to consider interest rate cuts now that inflation is nearing the Fed’s 2% target.

The Fed cut the benchmark rate a quarter of a percentage point last week to a range between 4.5% and 4.75%.

Traders now see a 65% chance of a 25 basis-point Fed rate cut in December, versus around 80% chance before Trump’s victory.

Meanwhile, Fed officials, including Chair Jerome Powell, are scheduled to speak this week, while US consumer and producer price index data, weekly jobless claims, and retail sales figures are also due this week.

Spot silver fell 2.2% to USD 30.60 per ounce.

Despite efforts to use less silver and replace it with cheaper metals, the rapid increase in installations and the growing use of N-type cells are likely to keep silver demand strong in 2024, Heraeus analysts said in a note.

Platinum lost 0.7% to USD 961.55, and palladium dropped 0.9% to USD 979.96.

(Reporting by Sherin Elizabeth Varghese in Bengaluru; Editing by Vijay Kishore and Maju Samuel)

Hedge funds pile into banks, dump green energy post US election, Goldman Sachs says

LONDON – Hedge funds snapped up bank stocks at the quickest clip in three years while taking bets against renewable electricity producers last week, a Goldman Sachs note showed, as investors reacted to Donald Trump’s win in the US presidential election.

Financial stocks, such as banks and trading companies, were the most popular and most net bought sector on Goldman Sachs’ prime brokerage trading desk last week, the note from Friday and seen by Reuters on Monday showed.

While the note did not specify which region’s banks attracted the most attention, a second note also sent from Goldman Sachs’ prime brokerage the same day said US banks would benefit.

Financial stocks are expected to get a boost from a lighter regulatory touch which many believe will come with the new Trump term, the second note said.

Finance companies were also seen benefiting from expected tax reform, it added.

“There is scope for US Financials positioning to rise further,” the second Goldman note said, adding that current hedge fund positioning in this stock sector remained on the lower side, historically.

US bank stocks rose as much as 11.1% on Nov. 6, from the previous day’s close after the news of Trump’s election win.

Prime brokerage desks lend to and arrange trades for hedge funds.

Long stock bets, expecting rising prices, were led by banks as well as companies offering consumer finance, capital markets, and financial services, the first note said.

Bullish bets centered on US stocks but included equities in developing markets in Asia. In Europe, hedge funds exited short positions and added long ones. A short bet anticipates the value of an asset price will fall.

Utilities companies were net sold for the first time in four weeks, “driven almost entirely by short sales,” Goldman Sachs’ first note said.

Independent power and renewable electricity producers were the most sold, with hedge fund bets against US utilities companies numbered at two shorts for every long position, the bank said.

(Reporting by Nell Mackenzie; editing by Dhara Ranasinghe and Andrew Heavens)

Tesla options draw ‘euphoric’ trading as Trump win fires up stock

NEW YORK- Investors are piling into bullish options bets on Tesla TSLA.O shares, with the stock hitting its highest level in more than two years on bets that CEO Elon Musk’s close ties to President-elect Donald Trump may benefit the electric car maker.

Tesla’s shares were up about 8% to USD 346.12 on Monday and have rallied more than 35% since the Nov. 5 election. They now stand at their highest level since April 2022.

Tesla’s contracts were the most heavily traded options on individual stocks on Monday, with some 2.5 million contracts changing hands by noon – more than twice the usual pace, according to Trade Alert.

“It’s euphoric,” said Steve Sosnick, chief strategist at Interactive Brokers. “Tesla is by far the most active option at our shop.”

He noted a heavy concentration of call contracts at the USD 400 level, some 13% above the stock’s current price. Trade Alert data showed much of the trading concentrated in near-term contracts, with options expiring by Friday making up about 56% of the total trading volume.

Musk has supported Trump for months and contributed at least USD 119 million to a pro-Trump spending group, federal records show. The billionaire’s business ventures, which in addition to Tesla EVs range from SpaceX rockets to Neuralink brain chips, depend heavily on regulation, subsidies and policy, and analysts said they could benefit from a friendly administration.

On Monday, Wedbush Securities raised its target price on Tesla shares to USD 400 from USD 300, saying they see the Trump White House win as a “gamechanger for the autonomous and AI (artificial intelligence) story for Tesla and Musk over the coming years.”

Tesla options struck at USD 350 and USD 400, and set to expire by Friday, were the two most actively traded contracts with a combined volume of about 180,000 contracts.

The bullish options action was also likely helping to push the stock higher, as options dealers who sold upside contracts reacted to the soaring stock by buying more of the shares to cover their own risk.

“If enough people speculate on certain strikes, the stock can have a tendency to move toward those strikes,” Sosnick said.

The big jump in the stock price and massive options interest also means Tesla call options are growing pricey and could draw sellers, said Brent Kochuba, founder of financial insights company SpotGamma.

Should the stock fail to keep up with its recent moves, it might lead to a drop in the price of those calls, he said.

“That can pressure the stock down,” Kochuba said.

(Reporting by Saqib Iqbal Ahmed; Editing by Ira Iosebashvili and Leslie Adler)

US high-grade corporate bond spreads lowest since 1998 after Trump election

NEW YORK – US investment-grade corporate credit spreads hit their lowest since 1998 this week in a sign of growing investor confidence in the US economy and in line with a surge in other risk assets such as stocks after Republican Donald Trump’s election as US president.

The spread on the ICE BofA US Corporate Index, a commonly used benchmark for high-grade debt, declined to 78 basis points on Thursday, its lowest since 1998. Spreads were at 86 bps at the end of last month.

Meanwhile, spreads in the ICE BofA US High Yield Index, which tracks so-called junk bonds, dipped to 273 basis points on Thursday, their lowest since 2007, down from 288 bps at the end of October, LSEG data on Friday showed.

The moves come amid a sharp rally in equities markets after Trump won a second term as US president in Tuesday’s election. His policies are largely expected to benefit corporations due to lower taxes and looser regulation.

The S&P 500 briefly touched the psychologically significant 6,000 mark for the first time on Friday.

Investment-grade credit index spreads narrowed 8 basis points over the week, which was the largest weekly narrowing for the index since June 2023, Daniel Krieter, director of fixed income strategy at BMO Capital Markets, said in a note on Friday.

(Reporting by Davide Barbuscia and Alden Bentley; Editing by Will Dunham)

2024 Mid-Year Economic Briefing: Navigating the Easing Cycle

Investing with Love: A Mother’s Guide to Putting Money to Work

Investor Series: An Introduction to Estate Planning

Policy rate views: Fed expected to do baby steps

Inflation Update: Faster but full-year average within target