MARKETS

Friday's hot US jobs data sent yields soaring, torching Wall Street's bulls and severely scrutinizing the S&P 500’s red-hot rally. As the new trading week unfolds, market watchers are on edge, praying for an inflation cooldown that might halt the relentless march higher of 10-year US Treasury yields to provide some semblance of rate relief. Yet, given the recent surge in strong economic data following the Fed's 100 basis points cut since mid-September, the heat is truly on. Bond traders are hedging their bets against the last mile of the inflation battle, skeptical that December’s inflation data will offer any comfort to the Fed or financial markets. With tariffs potentially launching in less than two weeks, the financial markets brace for turbulent times ahead, wondering if we can genuinely tread a path toward moderating inflation.

The policy-sensitive 10-year yield has hit its highest point since October 2023, yet caution is advised against placing too much emphasis on any specific level. The rapid rise in yield, rather than merely breaching a critical level, has transformed good news into bad news. This swift climb is causing spikes in market volatility, turning what should be positive economic signals into sources of investor anxiety and market tumult.

The market is blazing a trail into uncharted territory, sounding alarms for heightened vigilance from the Federal Reserve and the forthcoming administration. A pivotal red flag waving in the financial winds is the resurgence of a hefty risk premium that investors now demand for anchoring their capital in longer-dated U.S. government bonds. This premium is essentially the extra yield investors insist upon to lock funds into long-term bonds until maturity, shunning the flexibility of rolling over shorter-term debts as market conditions evolve. This escalating demand for a risk premium starkly underscores the deepening investor apprehension about the future of U.S. fiscal policies, especially as the Treasury, guided by Scott Bessent, gears up for more frequent and heftier bond issuances and extends the maturity spectrum of government debt.

As we step into another earnings season, the stakes remain perpetually high, but this time around, the landscape is fraught with pronounced two-way risks. Investors find themselves in a scenario where sensitivity to earnings misses is amplified. This heightened vigilance is due to tempered expectations for Federal Reserve easing in 2025 and the uneasy alignment of rich aggregate valuations and elevated US yields. In this environment, any deviation from the expected positive corporate performance could significantly swing the pendulum into bear territory.

ASIA OPEN

If the tumultuous response in U.S. stocks, bonds, and the dollar to the red-hot U.S. employment report is any sign, Asia markets are set for a turbulent start on Monday. Expectations are set for a sharp downturn by a steep climb in bond yields and surging inflation worries.

Futures in Tokyo indicate a plunge of over 1% at Monday’s open. Similar downturns are anticipated across the continent.

The atmosphere is tense, fueled by the meteoric rise in long-term bond yields that have tightened financial conditions globally.

Adding to the skittish sentiment is the uncertainty over how Asian economies, especially China, will fare under the shadow of the incoming Trump administration's 'America First' trade policies. This complex backdrop paints a distinctly bearish picture for the start of the week in Asian markets.

Financial markets typically recoil from uncertainty, yet President-elect Trump seems to draw energy from it. In December, the U.S. Trade Policy Uncertainty Index skyrocketed to 13.5 times its long-term average, marking its highest point since the early days of Trump's first administration. This surge also ranks third highest since the index's inception in 1985, reflecting the heightened anxiety and volatility surrounding Trump's unpredictable trade policy maneuvers.

Dario Caldara, Matteo Iacoviello, Patrick Molligo, Andrea Prestipino, and Andrea Raffo developed a Trade Policy Uncertainty (TPU) Index that gauges the level of uncertainty in trade policies based on how frequently terms related to trade policy and uncertainty appear together in major newspapers. This index first surged in the 1970s due to the Nixon and Ford administrations' shocks to U.S. trade policy. It saw further increases during the 1980s amid trade tensions with Japan and spiked during the NAFTA negotiations in the mid-1990s. The TPU Index reached unprecedented heights following the 2016 U.S. Presidential Election, with significant spikes as trade tensions escalated notably with China and Mexico, reflecting the volatile nature of international trade under shifting political landscapes.

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