Trump’s Treasury Secretary pick adds to positive mood
Donald Trump’s nomination of hedge fund chief Scott Bessent for Treasury Secretary added to the positive mood in stocks, bonds, currencies and commodities at the start of the week.
An already-positive mood for risk assets and US stocks in particular may be getting better.
Stocks, bonds, currencies and commodities mostly rallied in Monday’s Asia-Pacific trading as Donald Trump’s nomination of hedge fund chief Scott Bessent for Treasury Secretary – while not unexpected – may lessen policy risks associated with the incoming Trump administration.
At the same time, there was hope for an easing of Middle East tensions after Axios reported that Israel and Lebanon are on the verge of a ceasefire agreement to end the Israel-Hezbollah conflict.
S & P 500 futures rose 0.4 per cent and the US 10-year Treasury bond yield fell 6 basis points to 4.34 per cent in response to Bessent’s nomination over the weekend.
Australia’s S & P/ASX 200 rose as much as 0.8 per cent to a new all-time record high of 8462.1 points.
The Australian dollar rose 0.8 per cent to a two-week high of US66.50c as the US dollar dived against most currencies. COMEX copper futures rose about 1 per cent. Gold dived 2.1 per cent to $US2,659.10 per ounce as safe-haven demand receded on the Middle East news.
Bessent, 62 years-old, is the founder of investment firm Key Square Capital Management.
He was the chief investment officer at George Soros’s Soros Fund Management from 2011 to 2015.
While Bessent has been publicly supportive of tariffs, he has also suggested that Trump’s tariff threats are a “negotiating tool” aimed at extracting concessions from other countries.
“The truth is that tariffs have a long and storied history as both a revenue-raising tool and a way of protecting strategically important industries in the US President-elect Trump has added a third leg to the stool: tariffs as a negotiating tool with our trading partners”, Bessent wrote in a FOX News oped.
November has historically been a strong month for US stocks.
In fact it tends to be the best week of the year with a thirty-year average gain of 2.3 per cent.
Thanksgiving week also tends to be particularly strong. The 50-year average gain this week is 0.64 per cent with 70 per cent versus an average gain of 0.17 per cent for other weeks of the year.
Morgan Stanley chief investment officer and equity strategist, Michael J Wilson said his takeaway from the US bank’s Asia Pacific Summit in Singapore last week “overarching agreement that America remains the best place for equity investors to be.”
Despite the S & P 500’s near-record-high valuations, the consensus view remains that they are justified by the also-high return-on-equity and better growth profile – the definition of high quality.
“To be clear, high-quality stocks are expensive outside the US too, and America doesn’t have a monopoly on these names,” Mr Wilson said. “However, the US has more of them, which explains why the quality metrics for the S & P 500 are much stronger than for non-US indices.”
Indeed the ratio of high quality US companies versus the rest of the world has grown.
At the other end of the spectrum, Morgan Stanley’s conference drew relatively little interest in China equities, as most investors viewed them as “cheap but still facing risks related to the recent rise in stock prices, potentially higher tariffs, and ongoing debt deflation.”
“The overwhelming consensus was that while there may be long-term value in China stocks, there’s no clear catalyst to realise it over the near term,” Mr Wilson said.
“In short, China stocks have almost the exact opposite profile of US stocks – low ROEs and valuations but negative price momentum, which keeps most investors sceptical and uninterested.”
In terms of valuation and sentiment, he said investors should be “a bit wary of the heavily-owned and well-loved nature of the US equity market”.
However, “valuation can remain elevated for extended periods of time when earnings growth is above average and the policy rate is down on a year-over-year basis.”
The clean sweep for Republicans in the US election outcome has boosted the US stock market and has also favoured the pro-cyclical tilt that Morgan Stanley has been recommending.
But the reversal of hard-landing fears and an aggressive start to the Fed cutting cycle were also important factors. “We’ve priced a lot of good news in a short period of time,” Mr Wilson said.
On another topic, he’s surprised at the doubt over Trump 2.0’s ability to streamline the government, particularly with Elon Musk’s role and his track record of executing on challenging goals.
“A successful outcome on these efforts could support a broadening in earnings growth and stock performance that has been absent, until recently,” Mr Wilson said.
“Bottom line, we are likely entering a higher-beta environment based on the sequencing of the policy changes (some good, some bad for equity markets) and execution on stated intentions.
But it should also be a “highly-reflexive environment, as equities will likely take their cue from other markets more than they normally do, especially rates and foreign exchange.”
With macro outcomes and policy still highly uncertain, Mr Wilson is ready to shift his preferences if growth, inflation, or policy expectations deviate from the current Goldilocks outcome.
The greatest risks to American exceptionalism in his view are: a persistently stronger US dollar hurting global liquidity and multinational earnings; a further rise in long-term bond yields driven by the term premium rather than economic growth; and higher inflation data that dissuade the Fed from cutting rates in December or lead to materially less dovish guidance.
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