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Welcome back to Physician on FIRE’s weekly market updates!
Next week’s U.S. inflation data could flip the switch on a global market reshuffle, sealing a December rate cut and fanning a just-right policy climate that fuels tech’s roaring ascent, sends currencies spinning under trade uncertainty, and invites bold bets on Europe’s and China’s quiet recovery.
Market Overview
U.S. equities ended the week divided between surging tech-driven growth stocks and lagging value segments. The Nasdaq 100 rose more than 3%, fueled by renewed belief in imminent rate cuts and investors’ willingness to pay premiums for companies promising earnings growth. The S&P 500, while less explosive, still gained nearly 1%, reflecting a market where pockets of strength in tech and comm. services outweighed weaker areas.
The Dow Jones slipped about 0.7%, weighed down by underperforming blue chips and lingering concerns tied to healthcare companies. Meanwhile, the Russell 2000 fell more than 1%, retreating after small-cap stocks rallied for the previous two weeks.
This style divergence suggests a market increasingly willing to price in just-right economic data – robust enough to stave off recession fears, but not so hot as to choke off the Federal Reserve’s accommodative bias. Robust November payrolls and supportive odds of a December rate cut fueled the growth cohort’s rally, while waning enthusiasm for energy, materials, and other value-oriented sectors gave more traditional, blue-chip portfolios a little break.
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Last Week’s Highlights
- Strong U.S. Jobs Growth: November’s +227,000 nonfarm payroll gain fueled expectations for a Fed rate cut this month.
- Fed Rate Cut Odds Jump: The market-implied probability of a quarter-point cut on December 18 jumped to 85% from 71%.
- JOLTS Surprise: U.S. job openings climbed to 7.74 million in October, underscoring persistent labor market strength.
- ISM Services Slip: The U.S. services PMI fell to 52.1 from 56, signaling softer expansion in a key economic segment.
- Factory Orders Rebound: U.S. factory orders ticked up 0.2% in October, reversing a September decline.
- French Government Collapse: A successful no-confidence vote toppled the prime minister’s minority cabinet, briefly rattling European markets.
- ECB Shifts Stance: Europe’s central bank hinted it may move beyond strict data-dependence, preparing for more proactive policy steps.
- Chinese Manufacturing Uptick: China’s official manufacturing PMI rose to 50.3 in November (from 50.1 in October), signaling a second consecutive month of expansion.
- China’s Housing Slide: New home sales by top developers fell 6.9% year-on-year in November.
- Australia’s Weak Growth: Q3 GDP expanded just 0.8% year-on-year, the slowest non-pandemic pace since the 1990s.
- OPEC+ Extends Cuts: Oil prices initially rose on a 3-month extension of OPEC+ production limits, then fell 1.1% for the week.
- Crypto Hits Milestone: Bitcoin briefly topped $100,000, capturing market enthusiasm on hopes of deregulation.
Week Ahead & Implications
U.S. Inflation: The Data Point That Seals December’s Rate Cut
With a 25-basis-point Fed cut now all but priced in, next week’s U.S. CPI release will decisively confirm the central bank’s dovish shift. Sources suggest that core inflation will moderate back toward 0.2%-0.3% month-on-month, putting to rest any notion that the Fed might hesitate.
Given the market’s near-90% expectation of a December rate cut, anything remotely aligned with consensus should clear the final hurdle.
This scenario turbocharges growth and tech sectors, which have been thriving in a world of softening inflation and ample liquidity. Investors should lean toward high-multiple equities and riskier credit exposures poised to benefit from cheaper money.
The message is simple: a just-right CPI locks in easier policy, stoking further gains in equities, particularly those already riding the wave of this year’s remarkable bull run.
Trump’s Emerging Trade Riddle: Amplifying Dollar Opportunities
As markets digest signs that the new U.S. administration may play slow or aggressively impose tariffs without warning, investors need to understand that trade policy is no longer just a background risk – it’s a front-and-center driver of currency values and global allocations. With sentiment primed for tension and Trump’s rhetoric suggesting something big could come at any moment, the dollar is at a crucial crossroads.
A sudden tariff announcement would shock trading partners, potentially boosting the USD in the short term against vulnerable currencies such as Canada’s, while adding to inflationary pressures further down the line.
Positioning now for potential dollar upside via long USD calls against the Canadian dollar, or even emerging market currencies, makes sense as an early hedge. The narrative is clear: U.S. trade unpredictability will fuel currency volatility, and those willing to ride a USD rally stand to benefit.
ECB’s Decision: Incremental Easing
As the ECB comes back to the table, the plot is obvious: another mild rate cut, likely 25bps, will reaffirm that Europe’s central bankers are ready to do more. While some are whispering about 50 basis points, the consensus and the data say otherwise. The ECB’s gradual approach signals that it’s bracing for further headwinds, acknowledging a weakening eurozone manufacturing base and tepid retail sales.
For markets, this gradual easing underpins European equities and eases financial conditions, even if growth remains fragile. Investors should rotate into European cyclicals and sectors that thrive in low-interest, liquidity-rich conditions. The currency impact is likely to push the euro lower, making Europe’s exporters more competitive and drawing capital back into the region’s undervalued markets.
France’s Political Shake-Up: A Surprising Tailwind for Europe?
Contrary to initial fears, the French no-confidence shock did not derail European markets – if anything, the swift collapse of the government, followed by promises of a general interest government, stabilized sentiment. This episode shows that investors were well prepared, having already priced in the political drama. Europe’s resilience in the face of political instability suggests that European equities and bonds can remain resilient even when economic data weakens.
The result: continued political support, stable credit conditions and tighter spreads.
Investors should take advantage of Europe’s unexpectedly stable environment by selectively adding to European equities, especially those exposed to global trade flows supported by a weaker euro and continued ECB easing. Europe’s political storms have ironically become buying opportunities.
Crypto’s Six-Digit Surge: Betting on the Next Leg
Bitcoin’s leap past $100,000 is a flashing signal that risk appetite and deregulatory momentum are fueling crypto’s next breakout. With minimal regulatory barriers, decentralized finance thriving, and big players quietly accumulating, the trajectory points to more inflows and higher highs.
The smart move here is to take advantage of this momentum through diversified crypto holdings or crypto-related stocks, with the expectation that even more money will flow into the sector as trust in fiat systems erodes and speculative spirits run hot.
Don’t doubt the sustainability of this move mid-run; instead, use it to capitalize on an asset class experiencing a perfect storm of deregulation, speculation, and technological promise. It also helps that MicroStrategy is pushing Bitcoin, and not just at low levels. Make sure you are hedged or go in with a small portion of your total funds.
Low Volatility, High Risk: Cheap Hedges Are Essential
With S&P 500 put options approaching historically low premiums, we’re witnessing an unprecedented complacency that is destined to break. Markets have gotten too comfortable, ignoring the growing combination of political uncertainty, lofty valuations, and stretched technicals.
The smart play is to lock in cheap downside protection now, before complacency ends abruptly, sending volatility and equity correlation soaring. The current environment cries out for portfolio insurance: buy cheap index puts or VIX call options to protect profits.
This is not a suggestion – it is a must. Take the bargain basement hedges now, because when the tide turns, the insurance will be painfully expensive.
China’s CPI & Export Data: Fueling a Trade-Driven Recovery Story
China’s upcoming CPI and export figures will demonstrate that Beijing’s stimulus measures are steering the economy into a modest upswing. While inflation may remain muted, any uptick in exports—thanks in part to a cheap currency and front-loaded orders amid tariff uncertainties — sends a clear signal: China is reclaiming its spot as a global growth engine.
With policymakers ready to roll out additional support if needed, industrial metals, emerging-market currencies, and key Asia-Pacific equity benchmarks stand to benefit. Investors should strategically add exposure to commodities and selective EM equities that thrive on China’s external demand. China’s data confirm that targeted stimulus is working, and global markets should prepare for a modest tailwind from the world’s second-largest economy.
Most Impactful Events to Watch Next Week
Credit: https://alphahero.ai/posts/dovish-cuts-trade-riddles-tech-s-triumph-dec-8-2024?access_token=3cgwvf
