Market Brief: Geopolitical Concerns Ebb, Markets Rewind

Financial markets are recovering from yesterday’s knee-jerk geopolitical selloff, with the dollar snapping out of a three-day losing streak, Treasury yields marching higher, and North American equity benchmarks setting up for a positive open. Oil prices are slumping on a dissipation in risk premia after Russian presidential spokesman Dmitry Peskov said his country was ready to discuss a possible cease-fire in Ukraine with US President-elect Donald Trump, and safe-haven currencies are giving back their gains.

Yield differentials continue to move in the dollar’s favour as traders pull back on expectations for Federal Reserve rate cuts, and the earliest year-ahead outlooks hitting our inboxes are all - boringly - bullish on the greenback and bearish on the euro. The consensus is therefore getting a little crowded for our liking, and we wonder if 2024 will end like so many years before it - with market action rendering most sell-side forecasts essentially useless by mid-December*. Perhaps not. But if so, some hedgers might want to consider legging into trades earlier might otherwise be typical.

Odds on rate cuts from the Bank of England are being pared back after inflation rose by more than anticipated in October. Consumer prices rose 2.3 percent on a year-over-year basis in the month, accelerating from September’s 1.7 percent print on a widely-expected jump in energy costs paired with stronger-than-forecast increases in the core goods, food, and services categories. With disinflation progressing at a slower pace, traders expect central bankers to stay on hold in December - odds on a move are holding at less than 10 percent - and see UK rates ending next year at around 4 percent, well above the 1.75 percent expected in the eurozone.

Pay growth in the common currency bloc accelerated in the third quarter, but this is not seen complicating the European Central Bank’s easing trajectory. According to Bank data, negotiated wages climbed 5.42 percent in the year ended in September, up from 3.54 percent in the second quarter as workers and their unions succeeded in bargaining for catch-up increases after a bout of high inflation. This is not expected to last - forward-looking wage trackers are pointing to softness ahead - and broader trends suggest that upside price risks have diminished materially. Policymakers are expected to deliver at least five rate cuts over the next year, keeping the euro on the defensive relative to other major currencies.

The Canadian dollar is stuck in purgatory, oscillating around the 1.40 threshold after yesterday’s hotter-than-expected inflation print reduced market-implied odds on a 50 basis point rate cut in December. We think upcoming growth and unemployment numbers will play a far more crucial role however: although headline consumer price growth accelerated more than forecast last month, rising 2 percent on a year-over-basis, and the two measures tracked most closely by the Bank of Canada rose to a 2.55 percent annual pace from 2.35 percent in September, it is clear that underlying inflation pressures remained quite soft. Upside price risks are unlikely to take jumbo-sized moves off the table, instead, signs of tightening in labour markets, rebounding housing markets, faster US demand, and a downshift in Fed easing should argue for a more cautious approach.

There are no major data releases on today’s agenda, but an after-hours earnings release from Nvidia could rock markets. The range of analyst forecasts is wide, reflecting uncertainty surrounding the manufacturing pipeline for the company’s next-generation Blackwell artificial intelligence chips. As the world’s biggest company, changes in Nvidia’s share price can materially impact equity index values, which then influence global currency markets through the risk appetite and capital flow channels. A move higher should help boost high-beta currencies like the Canadian dollar and weaken safe haven units, and a disappointment should have the opposite effect.

Traders will also remain focused on the selection process for the next US Treasury Secretary. If Trump chooses a pragmatic moderate like Scott Bessent, Marc Rowan, Kevin Warsh for the position, market participants are likely to react with modest relief, boosting US equity market valuations even as they sell the dollar. If, instead, someone more controversial - someone who has more in common with other cabinet picks like Matt Gaetz, Robert F. Kennedy, Tulsi Gabbard, or Pete Hegseth - winds up on top, markets could move in the opposite direction, with risk appetite receding and the dollar gaining. The former is our base case, but anything is possible.

*The last time the consensus forecast - extracted from year-ahead outlooks published by major banks - was directionally correct was 2018, and in most years since, currency markets have begun trending in an opposing direction before year end.

Economic Calendar