The so-called Trump trade, which hurt European exporters in tariff-sensitive assets like the Mexican peso and drove investment into U.S. stocks and the dollar, has proven to be right after former President Donald Trump won the U.S. election in November, but December could be volatile, with the Trump trade vulnerable to a bond market rally and tariffs that could push up inflation and disrupt supply chains.
BCA Research said that "overstretched (U.S.) equity valuations reflect complacency as the more challenging environment we expect has not yet been priced in."
Here are some of the assets that are attracting market attention and are likely to be caught in a "bloodbath" because of Trump.
Currency Dilemma
The euro experienced its worst monthly decline since early 2022 this month, falling more than 3% against the dollar to around 1.05 this month due to U.S. tariff risks, political turmoil in Germany and France and a sharp downturn in the regional economy.
Analysts expect further volatility in the $7.5 trillion a day currency market as debate intensifies over how far the euro has to fall and whether Trump will really boost the U.S. economy at the expense of most other countries.
In November, the Mexican peso fell more than 1% against the dollar and the pound fell nearly 2%. Nick Rees, senior market analyst at Monex Europe, said, "The key question for foreign exchange markets is whether Trump's victory heralds a fundamental structural shift in the global economy, or is the market just engaging in a knee-jerk panic reaction?"
Bitcoin, boom or bust?
If there was any asset that performed well in November, it was Bitcoin.
The cryptocurrency surged 37% and approached the $100,000 mark on expectations of a more crypto-friendly regulatory environment under Trump.
The last time Bitcoin saw such a big rally was in February, when funds poured into the new U.S. spot Bitcoin ETF.
So, what happens next? Some in the industry believe that Bitcoin’s rise to $100,000 will mark the asset’s final evolution into a mainstream investment.
“If bitcoin breaks above $100,000 ... then more people might be looking at cryptocurrencies,” said Dan Coatsworth, an investment analyst at AJ Bell.
However, others see a risk of excessive speculation, meaning that a surge in Bitcoin could also be followed by a sharp drop, leaving some investors hurt.
Tech stocks hit by tariffs
Wall Street's tech-heavy Nasdaq 100 index posted its best monthly gain since June as Tesla, owned by Trump ally Elon Musk, surged 33% in a month and an earlier boom in artificial intelligence drove Nvidia's gains even as the chipmaker forecast slower sales growth.
Still, risks are growing for U.S. tech stocks as Trump’s tariff plans threaten their supply chains and a surge in artificial intelligence spending by so-called superscale companies such as Microsoft, Meta and Amazon has stoked investor concerns.
“There is a fierce ‘arms race’ among the major super-scale companies and they may have over-invested,” said Mikhail Zherev, manager of the Innovation Fund at Amati Global Investors. “We have reduced our exposure (to artificial intelligence).”
The European Central Bank warned last week of "adverse global spillovers" if an artificial intelligence "bubble" bursts and causes a plunge in technology stocks that dominate global stock markets.
Bank Run
While bullish on large U.S. banks, investors are bearish on European banks.
The U.S. bank index surged 13% in November, its best monthly performance in a year, helped by expectations of less regulation under the Trump administration.
But European bank stocks have fallen 5% this month as the euro zone economy weakens and markets increase expectations for European Central Bank rate cuts. Still, they are up 16% so far this year, helped by relatively high lending rates.
A JPMorgan brokerage note to clients showed that despite the good performance, hedge funds are still net selling European bank stocks.
A Deutsche Bank report said the industry must respond and step up fee-generating activity from asset and wealth management as well as trading and investment banking.
The world's major bond markets are "going their separate ways"
For bonds, November may well mark the month when the major bond markets, which usually move together, go their separate ways.
Although the 10-year Treasury yield was little changed at the end of November compared with the previous month, the main direction of the market still seems to be upward. The yield has surged 60 basis points since mid-September on strong data and expectations of higher inflation and fiscal deficits under Trump's policies.
Capital Economics expects the 10-year Treasury yield to rise to 4.5% by the end of the year from around 4.24% now.
By contrast, 10-year German government bond yields have fallen more than 20 basis points this month to around 2.15%, on track for their biggest monthly drop since 2024, as economic activity weakened, Trump’s tariff threats and an escalation in the conflict between Russia and Ukraine escalated.
In Japan, the story was different, with its 10-year bond yield posting its biggest monthly gain since May, partly due to a fall in the yen after Trump's election victory, fueling speculation of a rate hike next month.
Article forwarded from: Jinshi Data
