Global Markets Overview

Global equities rebounded last week, buoyed by the continued strength of the U.S. economy and renewed enthusiasm for "Trump trades" following Donald Trump’s return to the U.S. presidency. The week was light on major global economic data, with the highlight being Friday’s global manufacturing and service sector PMI reports. These revealed a stark contrast: robust growth in the U.S. economy against a weakening and increasingly uncertain outlook in Europe.

Japanese and European stocks underperformed, while the S&P 500 rose by 1.7% and the NASDAQ-100 by 1.9%.

Trump Administration Updates

In political news, the nomination of hedge fund billionaire Scott Bessent as Treasury Secretary offered some reassurance to markets, standing out as a relatively moderate choice compared to Trump’s other cabinet selections. However, Bessent’s strong pro-tariff stance aligns with Trump’s, keeping the risk of future trade wars alive as the new administration takes shape.

Geopolitical Risks: Russia-Ukraine Tensions

Geopolitical risks escalated as the Russia-Ukraine conflict intensified. Ukraine launched U.S. and U.K.-supplied missiles into Russian territory, prompting Russian warnings of potential nuclear retaliation. Surprisingly, global equity markets appeared largely unfazed, possibly reflecting skepticism that the situation would escalate to such extremes.

Corporate Highlights

• Nvidia: Despite beating expectations for earnings and revenue, Nvidia’s stock initially dipped following its results before quickly recovering, underscoring the enduring strength of AI-driven investor sentiment.

• Cryptocurrencies: Bitcoin surged further, approaching the $100,000 mark, fueled by unrelenting crypto enthusiasm. The cryptocurrency has gained a staggering 50% since early October.

Central Bank Commentary

Several members of the Federal Reserve signaled a cautious approach to further rate cuts, emphasizing “patience.” Markets currently see a 60% probability of a rate cut next month but anticipate only two additional cuts in 2025.

Global Week Ahead

Key events this week include:

• Fed Minutes: The release of minutes from the Federal Reserve’s latest meeting is unlikely to bring surprises.

• US PCE Deflator: October’s private consumption expenditure (PCE) data will be closely watched. Core prices are expected to rise 0.3%, nudging annual core inflation from 2.7% to 2.8%. Markets remain unfazed, as the Fed expects inflation to continue its gradual decline over the next year, supported by easing housing costs.

Developments in the Russia-Ukraine conflict will also remain a critical focus for global markets.

Market Trends

• US Outperformance: U.S. equities have strengthened since Trump’s victory, with small-cap stocks showing tentative signs of recovery. Meanwhile, growth stocks and the NASDAQ-100 continue to deliver strong relative performance.

• Sector Performance: Global "quality" stocks have underperformed, reflecting their limited exposure to the outperforming financial sector and heavier exposure to the underperforming healthcare sector.

Australian Market Update

The Australian market followed global trends, bouncing back despite hawkish rhetoric from the Reserve Bank of Australia (RBA). RBA comments helped the Australian dollar regain some ground, even in the face of weaker iron ore prices and broader USD strength.

RBA November Meeting Minutes: Key Takeaways

The standout comment from the Reserve Bank of Australia's (RBA) November meeting minutes was a clear signal of caution: even if “inflation declined materially more quickly than currently forecast…[the Board] would need to observe more than one good quarterly inflation outcome to be confident that such a decline in inflation was sustainable.”

This implies that even if the Q4 CPI report in late January shows strong results—such as annual trimmed mean inflation dropping to 3.25% (better than the RBA’s current forecast of 3.5%)—it may not be enough to justify a rate cut at the RBA’s February meeting, as previously anticipated.

Updated Expectations for RBA Policy

This cautious stance casts doubt on the likelihood of an early 2025 rate cut, making it increasingly likely that the RBA will wait until May—after the release of the Q1 2025 CPI report—to consider easing monetary policy.

Two additional factors appear to be reinforcing the RBA's resolve:

1. Resilient Domestic Conditions: Without a notable downturn in consumer spending or employment, the case for cutting rates sooner remains weak.

2. Global Influence: The return of Donald Trump and diminishing expectations of U.S. rate cuts in 2025 have likely hardened the RBA's position to maintain tighter monetary policy.

Delaying a potential rate cut until May also sidesteps any potential political implications, as the RBA's May meeting will occur shortly after the latest likely date (17 May) for a Federal election.

Upcoming Data and Key Focus: October CPI

This week’s October monthly CPI report is set to take center stage. September’s report saw annual trimmed mean inflation fall to 3.2%, and the question now is whether this figure will hold, edge lower (potentially below 3%), or correct upward given the volatility of this measure.

Implications and Market Outlook

The combination of persistently high inflation, stable employment, and global influences like U.S. monetary policy is likely to keep the RBA cautious in the short term. While the October CPI report will provide some guidance, it appears increasingly clear that the RBA is not inclined to act prematurely, preferring to wait for more consistent data to confirm a sustainable decline in inflation.

Rick Maggi CFP, Financial Advisor (Perth), Westmount Financial

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Disclaimer
This document has been carefully prepared by Westmount Securities Pty Ltd (ABN 42 090 595 289, AFSL 225715) for general information purposes only. However, neither Westmount Securities Pty Ltd nor any of its affiliates guarantee the accuracy or completeness of any statements contained herein, including any forecasts. It is important to note that past performance is not a reliable indicator of future outcomes. This material does not consider the specific objectives, financial circumstances, or needs of any particular investor. Therefore, before making any investment decisions, investors should assess the relevance of this information to their individual situation and consult professional advice, taking into account their unique objectives, financial position, and needs.