THIS WEEK WITH SADIQ
Central banks react to the Trump 2.0 agenda
December 16 to 20, 2024
Market Update
- Equity markets stepped back this week after a run of strong gains, but major North American indices remain near record highs heading into the end of the year.
- The S&P 500 slipped 0.6% as solid gains in communication services and consumer discretionary were offset by drags in most other sectors.
- The TSX fell 1.6% with all sectors in the red.
Monthly perspectives
Equities
Fixed Income
Cash
Asset Mix
- We are maintaining a sizeable overweight to equities this month as we expect investor sentiment to improve following Trump’s victory and we remain tactically geared for a risk-on year end.
- Additionally, the U.S. economy continues to positively surprise.
- The better-than-expected U.S. economy also means the U.S. Federal Reserve (“Fed”) may slow its interest rate cuts in 2025.
- We upgraded fixed income to neutral and we prefer to fund equities from cash.
Canada
U.S.A.
EAFE
EM
Equity
- Our regional equity mix remains unchanged this month.
- We continue to prefer U.S. equities given our bullish view on U.S. economy and outlook for corporate earnings.
- We remain underweight to international and emerging markets (EM) equities as we expect these markets to face increasing headwinds from Trump’s “America First” policy agenda while we suspect their economic outlook might disappoint.
- We remain neutral on Canadian equities, but we prefer them to international and EM equities as we think Canada is better positioned to handle Trump’s policy agenda while the more aggressive Bank of Canada rate cuts will help the Canadian economy in 2025.
IG Credit
High Yield
EM Debt
Duration
Fixed Income
- We upgraded bond duration to a small overweight as the sluggish pace of Canadian economic activity is supporting the case for aggressive Bank of Canada rate cuts.
- We downgraded investment grade fixed income to neutral as we prefer to take equity risk given the tight credit spreads.
- We upgraded gold back to a small overweight as we expect inflation fear to persist while we believe investors’ appetite for gold remains in a secular bull market.
Value
Size
Quality
Momentum
Style/Factor
- Our factor-based positioning remains unchanged this month.
- We continue to expect factor rotation after Trump’s election toward value and small caps, while we expect quality companies to continue to do well and offer a better cushion in case the U.S./global economy cooled unexpectedly.
Canadian Dollar
Gold
Implementation
- The long-term bull case for gold remains largely intact as a portfolio diversifier while EM central-bank appetite for gold continues.
- We remain neutral on the loonie this month, acknowledging that while Trump tariffs could hurt the loonie, we think a lot of bad news is reflected in the value of the Canadian Dollar.
- Once the dynamics of tariffs peaks and diminishes, it could be a good window to start hedging U.S. Dollar exposures, something to watch for during the first half of 2025.
Disclosures
The viewpoints expressed by the author represents their assessment of the markets at the time of publication. Those views are subject to change without notice at any time without any kind of notice. The information provided herein does not constitute a solicitation of an offer to buy, or an offer to sell securities nor should the information be relied upon as investment advice. Past performance is no guarantee of future results. This communication is intended for informational purposes only.
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Weekly Commentary
Interest Rates
Last week, U.S. inflation data for November came in slightly hotter than expected, with the Consumer Price Index (CPI) rising to 2.7% year-over-year from 2.6% in October. Could this prevent the U.S. Federal Reserve (Fed) from lowering interest rates this week? We still think the most likely scenario is a 25-bps cut, which is what markets had expected before the CPI news. Yes, inflation has proven sticky, but it’s probably not outside of the range the Fed was expecting. Next year, they’ll likely exercise a bit more caution, especially given the uncertainty around Trump’s priorities. Fed Chair Jerome Powell would probably say that they don’t make decisions based on the legislative agenda, but in reality, they probably do consider it alongside hard economic data. Ultimately, however, it’s the data that causes them to pull the trigger. North of the border, the Bank of Canada (BoC) lowered rates by another 50 bps last week—its second supersized cut in a row. This move was in line with markets’ expectation, and while it was supported by the underlying data, we also think it indicates some concern at the BoC about Trump’s proposed tariffs—a pre-emptive move to cushion the Canadian economy and consumer in case a less desirable scenario unfolds. The cut also shows that the BoC isn’t particularly concerned about the Canadian dollar (CAD), which is a little surprising given that it’s currently hovering near a several-year low versus the U.S. dollar. Our expectation is that we won’t see another 50-bps cut from the BoC in the near future—their comments were a bit hawkish, which actually caused the CAD to bounce slightly.
Bottom Line: We expect a 25-bps cut from the Fed this week, while the BoC’s latest 50-bps cut likely came at the expense of more cuts next year.
Europe
Staying with the theme of rate cuts, the European Central Bank (ECB) lowered rates by 25 bps last week. This was expected but perhaps a less aggressive measure than markets had hoped for. Interestingly, the ECB highlighted that the cut had less to do with Trump and potential tariffs and more to do with the state of the European economy and political uncertainty. Their primary concern at present appears to be stabilizing economic growth and supporting the health of the consumer. There are still headwinds on several fronts: economic struggles in Germany, the political situation in France, and the continent’s previous reliance on cheap Russian oil, which they can’t access currently. Trump’s trade plans are certainty in the back of their minds; it's a foregone conclusion that tariffs won’t be a positive for Europe, but it remains to be seen what sort of tariffs are imposed, which will determine whether they’re a big negative or a small negative. (We think a small negative is more likely.) Europe also relies on Chinese consumers, who have been saving more and been hurt by their domestic real estate sector. That situation could improve if Beijing does introduce further stimulus measures, but it would take some time for consumer confidence to rebound. Ultimately, that may explain why the ECB chose to lower rates last week.
Bottom Line: Given the various headwinds for the European economy, the only mild surprise was that the ECB’s latest rate cut wasn’t even bigger.
China
Speaking of China, there's been some uncertainty in Chinese markets recently over the type of stimulus that the government may introduce. Despite the lack of clarity coming from Beijing, we do expect stimulus—they’ve talked about it enough that it would be difficult to walk back at this stage—and we think it could come on both the monetary and fiscal sides. We are beginning to see a bit of momentum from the Chinese consumer in response to growing hints that help is on the way. But nothing we see from the government is likely to fix the property sector overnight, and that’s been the Chinese economy’s greatest weakness. When you look at quarter-over-quarter data, there may be signs that the real estate picture is stabilizing. But the big question is: will Trump’s trade policies cause another downturn? If the tariffs target high-margin businesses like electric vehicles (EVs), the impact could be muted. If they target lower-margin areas, however, then that could more seriously hinder growth. Right now, the uncertainties are too numerous for anyone to know exactly how things will play out. We stay cautious for now.
Bottom Line: We expect some good pops in China, but it may not make sense to sit and wait in those positions; instead, we think waiting for a pullback in Trump’s rhetoric may be the better opportunity.
Positioning
For a detailed breakdown of our portfolio positioning, check out the latest BMO GAM House View Report, titled Tying a bow on 2024: A year of convictions rewarded.