Monday Digest
Posted 25 November 2024
More and more loose ends
As we formulate our 2025 market outlook, the medium-term scenario looks increasingly littered with new variables. Cracks are appearing in the ‘Trump trade’ for US stocks. Investors hoped Trump II would pick a consistent, business-friendly cabinet, but it’s increasingly looking like a medieval court – competing influences potentially leading to erratic policy. Elon Musk wants to slash spending in his “government efficiency” drive, but that will hurt growth if it happens before Trump’s expansionary promises. Investors were even disappointed by Nvidia’s earnings – which beat analysts forecast, but the beat’s size was nevertheless below the previously stellar standard.
UK inflation was higher than expected, but the Bank of England calmed bond markets with dovish signals. The autumn budget probably led to this dovishness: commentators bemoan that NI increases will hurt jobs, but that could actually help the BoE’s efforts to curtail wage inflation. UK bond yields fell, also due to weaker-than-expected retail sales and business sentiment. Sterling dropped, but that actually boosted sterling-denominated UK stock prices.
European stocks had the same currency boost after similarly weak data. Markets expect Trump’s policies to widen the US-EU growth gap, and the difference in business sentiment surveys backs up that expectation. Still, European businesses might be overly pessimistic, if tariff threats turn out to be negotiating tactics and the Ukraine escalation proves to be the darkness before the dawn. A stimulus-led rebound in Chinese demand would be a crucial boost, too, and Chinese data is already improving. For Chinese assets themselves, the key question now seems to be whether the US will freeze them out of the global economy.
Back to Trump, then. The potential impacts of his policies cover the whole range from disastrous to very bullish, and no one really knows where on that spectrum we might land. But, investors shouldn’t hide from this uncertainty, as de-risking could easily lead to missing out on a significant rally. Diversification and staying level-headed is key. That’s always our objective, and it’s more important now than ever.
Will the US be able to “drill baby drill”?
It was assumed that Donald Trump’s “drill, baby, drill” policies would benefit US oil companies, but the opposite might be true. The global oil market is oversupplied, which has consistently weighed down crude prices this year despite geopolitical fears. The fundamental problem is weak Chinese demand, which has a lot of ground to make up even if Beijing’s stimulus packages work. The IEA predicts an oversupply of one million barrels per day in 2025, even as OPEC+ is maintaining its production cap. US oil magnates backed Trump in the election, but growth in shale oil is weak and expected to slow further.
Oil producers need a demand boost, not a supply boost. China’s consumption stimulus might help, but shale producers will struggle to take advantage while Trump wages trade wars. His tariffs will also increase costs for US refineries that buy foreign crude. The idea is to make them buy American, but many don’t have the infrastructure to refine the grades of crude most commonly produced in the US. Trump’s geopolitics might also indirectly boost foreign oil production – through Russia finding it easier to sell its oil, for example.
Supply-side reforms take a long time, and oil analysts expect that Trump’s boost to US production might only be felt after his term ends. But if “drill baby drill” is a long-term strategy, it will come up against the long-term headwind of a global renewable energy transition. Renewables will likely get cheaper over the long-term regardless of what Trump does. He may also have a harder time slashing green investments than anticipated, given that many Republican areas have benefitted from them.
The short-term price outlook remains weak, and it is hard to be bullish about the long-term. US oil companies might fare relatively better than non-US producers because of Trump’s preferential treatment, but demand is still the fundamental problem.
The slow death of the WTO
Nothing symbolises Trump’s disruptive effects on global trade better than the slow demise of the World Trade Organization (WTO). It was a symbol of US-led globalisation since its 1995 inception, but its most historic moment – China joining in 2001 – might have ironically been the beginning of its end. China’s industrial growth has since fuelled the American discontent that first propelled Trump to the White House. He then effectively crippled the WTO’s rule enforcement by refusing to appoint judges to its board.
As with Chinese tariffs, Biden maintained his predecessor’s indifference to the WTO. The mood in Washington had changed, and he had his own economically nationalist plans for green investment. Other world leaders – most notably Europeans – want to salvage the organisation and are worried Trump might now finish the WTO off. That misses the point: Trump doesn’t have to kill the WTO, because Washington already considers it irrelevant. Trump’s promised tariffs flagrantly violate WTO rules, but barely anyone brings that up. Foreign leaders appeal to inflation and US self-interest to curtail Trump’s tariff-setting, tellingly trade rules don’t get a mention.
The post-WTO world will likely have more regionalisation than old-school economic nationalism. You would normally expect European leaders to side with Washington, but they notably refused to do so on Chinese tariffs during the last two administrations. An openly hostile Trump could push the EU and China closer together, and possibly lead to retaliatory tariffs on US goods or services. The “or services” part is interesting, because they include huge tech revenues which are hard to tax. The WTO has nothing to say about this: it was built for cars and crude, not cloud computing. The next four years in global trade are looking to be beyond interesting.