Daily Commentary

MarketMinder’s View: This piece is a mishmash of sensible and misperceived components, running through China’s currency policy and the increased use of the yuan in settling China’s international trade. This offers a few factoids around that, arguing centrally that “It doesn’t appear that it is trying to end dollar dominance, although that might be a long-term goal, but to insulate its own economy and financial system from that dominance as rapidly as it can. Increasing use of the yuan in international transactions also helps extend and expand its spheres of influence. … Overall, about 30 per cent of its $US6.2 trillion-plus global trade in goods is now settled in its own currency, although its global market share in trade finance of less than 6 per cent is a fraction of the United States’, with the dollar used for about 55 per cent of trade finance transactions and nearly 90 per cent of global foreign exchange transactions.” All of this seems like a pretty transparent response to America’s use of sanctions on Russia, Venezuela and others in recent years, which China likely sees as a risk, given its huge dollar-based foreign exchange reserves. But it is a mistake to see this as a threat to the dollar’s reserve currency status. “[China’s] bond market is a fraction of the size of the US Treasury market, its strict capital controls (loosened marginally in recent years) constrain free movement of capital and its legal and judicial systems are opaque, intimidating and, it would seem, influenced by political considerations.” Nonsensically, though, the article weaves in recent forex market moves as evidence the US dollar’s status is under threat regardless, noting it had weakened as much as -11% versus a currency basket earlier this year—and touting China’s managed yuan float as a “strong and stable” policy this year. But America’s dollar routinely weakens under Republican presidents, and this year’s slide parallels one seen in President Donald Trump’s first term. The dollar’s status didn’t change. Moreover, the dollar’s level versus a currency basket is still at a mark considered too strong not long ago. Heck, the dollar surged when Trump was elected! Were the dollar’s reserve currency prospects somehow enhanced by the very event that brought him back to the White House? Overthinking wiggles in markets, including forex markets, is a mistake, in our view.

MarketMinder’s View: The European Commission, the EU’s executive branch, published its Autumn Forecast for full-year economic growth in 2025, 2026 and 2027, with real EU GDP projected to grow 1.4% in both this and next year before accelerating to 1.5% in 2027. Inflation is expected to hover around the ECB’s 2% target over this span. Now, this article documents all the nitty gritty of that, which isn’t really our interest. It is more that the forecast and coverage, read at a higher level, suggests warmer sentiment. Officials like EU Economy Commissioner Valdis Dombrovkis touted the bloc’s resilience in the face of the “challenging external context” (read: US tariffs and associated uncertainty). Or, as the coverage noted, “Latest business indicators and survey data point to sustained positive momentum in the coming quarters. Looking further ahead, the global environment remains challenging, says the report, but a resilient labour market, improving purchasing power and favourable financing conditions are set to support moderate economic growth. … The EU’s highly open economy remains susceptible to ongoing trade restrictions, but the trade deals reached between the US and its trading partners, including the EU, have alleviated some of the uncertainties that overshadowed the Spring Forecast.” The sunnier coverage here seems to reflect gradually warming sentiment in the bloc, although that warming is lagging the US’s optimism. This suggests to us there is still a significant wall of worry for European stocks to climb.

MarketMinder’s View: As we went to great pains to detail for you recently (you’re welcome), Britain’s Labour government has floated a vast armada of trial balloons ahead of November 26’s Budget announcement—raising expectations some kind of austerity is coming. While this raised near-term fear of tax hikes hammering growth and stocks (which morphed into deficit fears once the government retreated from income tax rate hikes), the reality is that it also prices those fears into markets. Investors don’t sit around and wait for events; they anticipate the outcome based on forecasts, talk, opinion and leaks. This is the latest evidence of that. “Allocation to UK equities saw the biggest three-month drop since October 2022, the poll showed. ‘In November, bearish asset allocation was expressed via allocation to UK stocks,’ strategists led by Michael Hartnett wrote in a note. Fears have been mounting about the economic outlook for the country, while the Labour government could announce tax hikes and austerity measures to plug the hole in the finances during the Autumn budget on Nov. 26.” All this mitigates the negative surprise power in whatever Chancellor of the Exchequer Rachel Reeves announces—and increases the likelihood the announcement is tamer than feared. This, plus the fact stocks rarely sway long on incremental tax changes and the reality that debt fears are decades old, suggests to us sentiment is just too low toward UK stocks.