Monday Digest

Posted 27 January 2025

Capital markets were a sea of green in Donald Trump’s first week back. US investors like his tax cut, deregulation agenda, but we have argued they might be underestimating the risks. Britons and Europeans might be biased though – as one survey revealed we are among the most pessimistic about what Trump means for our own futures. US investors think Trump’s threats are “the art of the deal” and the early interactions with US trading partners suggest they might be right. Even so, political volatility can frustrate policy – as in Elon Musk’s recent disagreements with some of Trump’s announcements.

Not all the US optimism is about the Trump trade, though. US economic data is strong and the Federal Reserve has made some dovish signals towards more rate cuts. That has led to increased demand for government bonds, whose yields now look attractive. Perhaps surprisingly, The most in-demand have been UK gilts – whose yields have now sunk below the US, despite predictions of UK fiscal disaster. A record oversubscribed bond auction last week showed international investors are more than happy to lend to the UK’s treasury.

The flipside of investors putting America first has been many putting Europe last. There was talk of “peak pessimism” on Europe at the World Economic Forum in Davos, but it’s notable that European stocks have been performing very well in total return terms this year. Business sentiment surveys suggest that Europe’s fortunes may be turning: European businesses are gaining confidence, while Americans are seemingly losing it. We should note that the US numbers are likely obscured by the Trump transition and should return to positivity, however.

European leaders have also expressed a desire to work with Trump and expand their military spending – as he has long demanded. That would effectively mean fiscal expansion, the short-term growth benefits of which shouldn’t be underestimated. We have argued for a while that, despite the doom and gloom, there is a plausible recovery scenario for Europe. More people seem to now believe it.

How valuable is a Trump meme?

Cryptocurrency traders are big fans of Donald Trump – but the new president angered many in the industry when he launched he and his wife each announced their own memecoins on the eve of inauguration. $TRUMP soared then quickly sank, and many criticised it for undermining faith in digital currencies. A crypto-friendly executive order, signed this week, went some way to redeeming him in the industry’s eyes, but inflating memecoins does nothing to help cryptos in the long-term.

Trump promises to be “the most pro-crypto president” ever, and Bitcoin prices hit a new all-time high after his inauguration. Crypto traders hope that a friendly White House will accelerate adoption and overcome the reputation of volatility and excess that has kept cryptos out of the mainstream.

$TRUMP and $MELANIA don’t help that reputation. Memecoins are speculative by nature – with prices based purely on the popularity of the meme – and hence some in the industry accused the president of corruption, using his position to boost his wealth. The irony is that the “speculative by nature” critique is often levelled at cryptocurrencies broadly. We suspect some of the anger might be down to nerves at how stretched the crypto rally has become, and the frothy trading in lesser known tokens.

Cryptocurrencies are slowly entering the investment mainstream, but we still don’t consider them appropriate for our portfolios, because they are fundamentally hard impossible to value. The technology underlying them – most notably blockchain – does have value in its economic potential, however, as do companies that trade in such assets and technologies. Crypto-related assets might be appropriate for long-term investors, but for cryptos themselves to be appropriate, we need to see broad acceptance and commonly agreed valuation methods. Trump’s policies might eventually help that, but inflating your own memecoin bubble does the opposite.

The changing commodity outlook

Commodity prices have been on a decent run over the last month, but the price outlook is uncertain because of global growth uncertainty. In general, we expect a near-term cyclical boost followed by long-term oversupply – but this varies across different commodities.

The oil market was oversupplied in 2024, but prices were supported by OPEC+ production cuts and geopolitical scares. Oil could rally from here, due to US sanctions on Russian shipping and the strength of US demand, but the longer-term outlook is less promising. President Trump plans to boost US production, and tariffs could weigh on demand.

The natural gas outlook is similar: supplies are currently tight (mainly in Europe) but Goldman Sachs expect a long-term boost in liquified natural gas (LNG) supplies from the US and Qatar. Some expect this to be outweighed by demand increases owing to AI datacentres, but we don’t see much evidence of this yet.

The exception is China, where energy demand has been strong and will likely continue thanks to government stimulus and efforts toward the green transition. This will benefit copper prices more than steel – which has traditionally rallied on Chinese stimulus.

Goldman Sachs expect last year’s gold rally to continue, as central banks keep buying the precious metal to diversify away from the dollar and hedge against inflation and geopolitical risks. Trade risks from Trump tariffs will likely mean more gold buyers.

Higher near-term commodity prices mean more inflation pressures. This might force the Federal Reserve to keep interest rates high, given US economic strength, but the European Central Bank is likely to ‘look through’ any spike and support its weak economy. The ECB will be particularly pleased if Goldman Sachs are right about the LNG supply glut. While that is a long-term consideration, it would remove the biggest headwind for European growth. The supply-demand balance could look very different in a few years.