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Nov 117 min read

AMC Weekly

Updated: Nov 12

Welcome to the third issue of the Bocconi Student Asset Management Club newsletter!


Global Economy


U.S.

On Thursday, the Federal Reserve cut interest rates by 0.25 bps, continuing its rate reducing policy after inflation started to slow down and came close to the 2% target. Fed Chair Jerome Powell assured that the results of the presidential election would have no effect on short-term monetary policy. As Trump will take office in January, the Fed will have to evaluate the impact of the new President's proposals, which include tariffs, tax cuts and deportation immigrants.


On one side, there is the question of the reaction from the Federal Reserve to Trump's action. On the other side, Trump might actively try to influence Powell or enter into a fight with him. It wouldn't be the first time: Powell, who was first appointed by Trump itself, later had a fall out with the then President. Over the summer, Trump stated its intention of letting Powell finish his work until the end of his term - i.e. May 2026. Either way, Powell made clear that he will not consider the option to resign under political pressure. We will stay tuned to see how the complicate relationship between the two unfolds.


As inflation and interest rates seem to move in line with Fed's expectations, and economic growth is not particularly high but healthy, Powell described the position of the economy and their own policies as a "very good place". The Federal Reserve believes that the risks to job market and inflation derived from rate cuts were "roughly in balance". As it can be observed from the personal consumption expenditures price index - excluding food and energy items - inflation has been stable. However, says Powell, little change does not equal stickiness.



EMEA

After debating the future of Germany’s economy for weeks, German Chancellor Olaf Scholz ultimately chose to fire his Finance Minister Christian Lindner to “prevent harm” to Germany. Lindner’s ousting resulted in a collapse of the chancellor’s coalition, and now Scholz will have to rely on a minority government to pass legislation until the January vote of confidence.


This governmental collapse will have severe economic consequences for Germany’s already slowing economy. Over the last 5 years, Germany has only experienced 0.2% growth versus 4.6% in the Eurozone, which can be attributed to the energy crisis sparked by the Russia-Ukraine war, high labor costs, an aging population, and outdated physical and digital infrastructure.


What makes the situation particularly dire is its convergence with the US elections. During Trump’s first presidency, Germany and France played a strong counterweight to oppose America. However, with the current state of Germany’s economy, Trump’s second presidency presents a struggle for the global interests of the European Union. For example, Trump is threatening 20% tariffs on German exports which could be a painful setback to the German economy considering 10% of its exports go directly to the US, largely in the automotive industry. The future of Germany’s economy hangs in a delicate balance as many firms are now scaling back investment and consumption is declining, leading to a likely contraction of the economy in Q4 of 2024. However, the hope is for the vote of confidence in January (or an early election in May if Scholz loses) to provide a stronger government that will end the economic stagnation and guide the future of economic policy.


China

Shortly into Donald Trump’s first presidency, China faced the sudden impact of tariffs on exports to the United States. Therefore, with the recent election results, China is anticipating another U.S.-China trade war given Trump’s campaign pledge to impose tariffs exceeding 60% of Chinese imports. Since Trump does not swear into office until January, outbound shipments from China have doubled beyond forecasts (from 5.2% to 12.7%) and factories are rushing to push exports before potential new tariffs are imposed. This export momentum has provided a much-needed boost for China amid persistent domestic challenges like declining household and business confidence tied to the property market debt crisis. The export surge has only furthered the trade surplus from $81.71 to $95.27 billion as imports have become expensive due to a weaker yuan. While in the short term, Chinese factories stand to benefit from the increased production to bypass forecasted tariffs until Q3 of 2025, China cannot be this reliant on exports for growth. Therefore, it is essential that Beijing introduces additional economic stimulus as Trump’s economy has not only called into question the future of the US, but also the new global world order.


Japan

On Saturday, the Bank of Japan (BOJ) Governor Kazuo Ueda spoke at a conference co-hosted by the Bank for International Settlements, the BOJ, the Bank of Spain and the Network for Greening the Financial System. BOJ stated its aim to keep inflation constant at 2% regardless of long-term shocks to future price developments caused by climate change. However, the Governor admitted the need to monitor closely the impact of climate change and measures for green transition, such as a potential carbon tax, on inflation expectations. The current green transition plan concerns companies actively investing in environment-friendly technology and involves the provision of fiscal subsidies worth 3% of the country's GDP, or 20 trillion yen ($131 billion) over the next 10 years. This strategy should then be followed by measures aimed at disincentivizing emissions, such as a carbon tax, emissions trading system fully in place by fiscal 2026, and fossil fuels surcharge as of fiscal 2028.


 

Equity Highlights


U.S.

Following the recent election, major stock benchmarks surged, with investor optimism fuelled by anticipated benefits from the Republican “red sweep” securing the White House, Senate, and likely House control. The projected outcome suggests a climate of accelerated earnings growth, reduced regulatory constraints, and lowered corporate taxes. Leading the gains was the small-cap Russell 2000 Index, which jumped 8.57% for the week, although it stayed below its record high from November 2021, closing 2.41% below that peak. Meanwhile, the S&P 500 Index rose 4.72%, marking its strongest weekly performance since early November 2023. In fact, it experienced an increase of about 2.5% just in the span of hours, following the elections announcement, making it the biggest one-day movement since November 2022.


Europe

In local currency, the STOXX Europe 600 Index fell by 0.75%, as concerns grew over how U.S. President-elect Donald Trump’s trade policies might affect European economic growth and central bank actions. Key European markets saw declines, with Italy’s FTSE MIB down 2.48%, France’s CAC 40 falling 0.65%, Germany’s DAX slipping 0.09%, and the UK’s FTSE 100 decreasing by 1.28%, despite the Bank of England lowering the interest rate by 25 basis points on Thursday, bringing it down to 4.75%.


China and Japan

According to recent data, China’s exports in October beat analysts’ estimates. This is presumably why the Hang Seng Index gained 0.70%, despite news of Trump’s plan on imposing tariffs on Chinese exports. In fact, most major Asian stock market indices registered increases this week, with Nikkei 225 closing with the largest weekly gains (2.59%) in a month and a half, following a spillover effect from the US Federal Reserve's decision to cut interest rates.


 

Fixed Income Focus: Bond Market Highlights


U.S. Treasury

Election results briefly pushed yields up on Wednesday, but the prospect of a rate cut from the Federal Reserve helped bring them down by Thursday evening. U.S. Treasuries saw positive returns heading into Friday, with yields mostly ending lower than the previous week. While yields on intermediate and long-term bonds dipped slightly, some short-term yields rose a bit (Bond prices and yields move in opposite directions, so higher prices mean lower yields).

Looking ahead, Fed Chairman Jerome Powell said that decisions would be made on a meeting-by-meeting basis, with no set path for monetary policy. He also mentioned that he felt good about the economy overall. One Fed meeting remains on the agenda for this year on Dec. 17-18, for which traders are pricing in an around 65% chance of another rate cut.


U.S. 30-Year Fixed Mortgages Rates

The average rate on a 30-year mortgage in the U.S. rose for the sixth week in a row, reaching its highest level since early July. The rate increased to 6.79% from 6.72% last week, according to Freddie Mac. While it’s still lower than a year ago it’s a noticeable rise.

After the 2008 financial crisis, interest rates dropped to historic lows, with mortgage rates following the trend. From 2012 to 2021, the 30-year fixed rate stayed low due to years of easy monetary policy. But as the economy rebounded post- pandemic and the Federal Reserve raised rates to tackle inflation, mortgage rates shot up. With inflation still a worry, geopolitical tensions, and growing U.S. debt, it's unlikely that mortgage rates will return to the pre-pandemic lows. Instead, we may be entering a period where rates are more in line with those seen in the early 2000s.


 

Wrap up for the Asset Management Division

  • Donald Trump’s presidency could spark big gains in certain parts of the stock market, especially U.S. small cap stocks, according to Citi strategist Scott Chronert. He notes small caps are better valued right now and could benefit from deregulation and a focus on boosting domestic manufacturing.

  • With Republicans in charge, the U.S. dollar could see a longer-term boost, having already climbed to its highest level in four months against other currencies after a post-election jump.

  • Next week, bond markets will be paying close attention to the CPI and PPI data, as the Federal Reserve continues to base its decisions on the latest data.


 

Credits:

Andrea Zito (Team Leader)

Lavinia Catalano (Global Economy analyst)

Mahek Dodani (Global Economy analyst)

Pablo Ruiz (Equity analyst)

Vladimir Pashov (Equity analyst)

Filippo Caselli (Fixed Income analyst)


 

References




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