Financial Markets

Thoughts on the increase in bond yields and this morning’s employment data.

In most developed economies, rising inflation expectations will lift them further above the 2 percent target, limiting the scope for further interest rate cuts. But in Japan, rising inflation expectations will lift them up to the BoJ’s 2 percent target, removing the BoJ’s justification for its zero-interest rate policy. The normalisation of Japan’s monetary policy poses a big structural risk to stocks because Japan has been the main source of financial market liquidity, and thereby, of rising stock market valuations. From a timing perspective though, wait until the complexities of the price trends in USD/JPY and/or Nasdaq versus 30-year T-bond have collapsed. Plus: go tactically long copper.

For our last publication of the year, we explore five key themes that will dominate the European macro landscape and markets next year. While the start of 2025 will be challenging for European assets, the latter part will offer some much-needed relief.

Trump's policies aim to support domestic producers and will be pro-growth and inflationary, at least initially. This environment is supportive of equities. Earnings will likely be strong, but elevated valuations make equities prone to a correction. Earnings growth broadening will translate into performance broadening – the S&P 493, Cyclicals, Value, Small and Mid are likely to outperform.