The past week saw markets digest the mixed signals about the implications of Donald Trump's election victory and early policy moves. The U.S. dollar continued its post-election surge, hitting a nearly two-year high, while the Aussie dollar, Euro, and Pound fell against the greenback. However, later in the week the U.SD pulled back modestly.

Volatility in Equities‍

With major U.S. indices like the S&P 500 and Nasdaq hitting record highs early on driven by gains in sectors seen as benefiting from Trump's policies, such as financials, energy and industrials. However, the rally faded as the week progressed, with small-caps underperforming, suggesting markets are reevaluating the "Trump trade." European shares were mixed.

Earnings Growth and the "America First" Paradox‍

One of the ironies of the recent strong U.S. earnings season is that companies with high international exposure, particularly exporters, have been leading the way in terms of earnings growth. Firms generating over 50% of sales outside the U.S reported much stronger earnings growth at 12.9% compared to just 1.5% for more domestically-oriented companies. Tech giants with substantial foreign revenues like Alphabet, Meta and Nvidia were called out as major contributors. This outperformance comes despite rising concerns that President Trump's expected policies, such as tariffs and restrictions on trade, could hurt internationally-focused businesses. There appears to be a disconnect between the market rewarding these global leaders in the near-term, while the incoming administration prepares to pursue an "America First" agenda that could undermine the very basis of their success. If Trump follows through aggressively on his trade policies, the earnings leadership from exporters could prove short-lived.

Trump’s Policy Signals

Trump's early Cabinet appointments, such as a known China hawk for Secretary of State and the CEO of an oil services company to head the Energy Department, suggests that he intends to pursue his campaign agenda assertively. This reinforced expectations for policies like tariffs, lower taxes, deregulation and unfunded fiscal expansion. While potentially inflationary and growth-positive near-term, there are concerns about the longer-term impact, including the risk of retaliation and a global trade war.

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Central Bank Reactions to Inflation Risks ‍

The inflation outlook was a key focus for central banks. While U.S. CPI and PPI data came in close to expectations, underlying price pressures appear to be building. This is causing markets to rethink the timing and pace of Fed rate cuts. A December cut is now seen as just over a 50% probability, versus 80% early in the week, following comments from Fed Chair Powell.

Other central banks also appear to be turning more cautious given the inflation risks. The RBA is now expected to wait until at least May for its next cut, with NAB seeing a risk they may not ease at all in 2025 if unemployment remains sticky around 4%. The BoJ and ECB are still expected to ease further, but more slowly. 

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Mixed Economic Data

Key data points painted a mixed picture. U.S. retail sales beat expectations but industrial production was soft. Chinese retail sales and fixed investment positively surprised. But Japanese GDP and UK data were lacklustre. Flash PMIs at the end of the week will provide a further read on global growth momentum.

Geopolitical Tensions

Geopolitical tensions also bubbled up again as the U.S. gave Ukraine the green light to fire into Russian territory. However, so far this hasn’t sparked a major risk-off move, with reactions largely confined to commodities like oil and gold.

Looking Ahead

Overall, it was a week of reassessing the market outlook as investors started to look beyond the initial euphoria or concern around the U.S. election result to focus on the specifics of the incoming administration's policies and appointments. While directionally pointing to higher growth, inflation and interest rates, there remains significant uncertainty about the magnitude and net impact. Central banks appear to be growing more alert to inflation risks and may prove less dovish than previously anticipated. Amid these swirling cross-currents, volatility is likely to remain elevated in the near-term.