Trading Day: Celebrate the 'TACO' strategy

Global Markets Surge Following U.S. Policy Shifts

On Thursday, international stock markets experienced significant gains after President Donald Trump reached a preliminary agreement regarding Greenland and retracted his proposal for new tariffs targeting several European countries. Investors were further encouraged by positive economic indicators from the United States.

Exploring the "Sell America" Trend

In today's analysis, I examine the resurgence of the "Sell America" sentiment and consider whether President Trump's confrontational policies might prompt global investors to reconsider their substantial $27 trillion exposure to U.S. assets.

Recommended Reads for Market Insights

• Trump highlights "total access" in Greenland agreement as NATO urges member nations to increase contributions
• European Union leaders express concerns about managing President Trump, despite his reversal on Greenland
• Greenland developments fuel a "hyper bull" market, according to Mike Dolan
• U.S. consumer spending posts solid growth in October and November
• Trump files a $5 billion lawsuit against JPMorgan and CEO over alleged politically motivated debanking

Major Market Movements Today

• Equities: Global markets advanced, with Wall Street climbing up to 0.8%. The Russell 2000 reached a record high, European stocks had their strongest session in two months, Japan's Nikkei rose 1.7%, and Brazil's Bovespa jumped 2% to a new peak.
• Sectors & Shares: Seven S&P 500 sectors posted gains while four declined. Communications services led with a 1.6% increase, real estate dropped 1.1%. Meta surged 5.5%, while General Electric fell 7.4%.
• Currency: The U.S. dollar index slipped 0.5%. The Australian, New Zealand, Swedish, and Norwegian currencies all strengthened by about 1% against the dollar.
• Bonds: U.S. Treasury yields edged up by 1-3 basis points. Japanese government bond yields declined roughly 5 basis points across the curve, partially reversing recent losses.
• Commodities & Metals: Oil prices dropped around 2%. Precious metals rallied, with gold reaching a new high above $4,900 per ounce, silver up 3%, and platinum gaining 6%.

Key Discussion Points

The Return of the 'TACO' Trade

President Trump's decision to ease off on Greenland and European tariffs likely stemmed from several factors, including the sharp downturn earlier in the week that affected Wall Street, U.S. Treasuries, and the dollar simultaneously. With midterm elections approaching and affordability concerns mounting, mortgage rates remain above 6% for most borrowers. The administration is keen to avoid a spike in long-term yields or a stock market downturn, reinforcing the perception that Trump often backs away from aggressive moves at critical moments.

The Strength of the U.S. Economy

Despite ongoing worries about trade disputes, inflation, and global tensions, the U.S. economy continues to demonstrate resilience. Third-quarter GDP was revised upward to an annualized 4.4%—the fastest growth in two years and a notable increase from 3.8% in the previous quarter.

Looking ahead, fourth-quarter growth appears even more robust, with the Atlanta Fed's GDPNow model estimating a 5.4% rate. These strong figures suggest that both growth and inflation risks may be tilted to the upside, raising questions about the Federal Reserve's decision to lower interest rates.

Upcoming Bank of Japan Policy Decision

The Bank of Japan is set to announce its latest policy update on Friday amid a challenging environment: the yen remains at historic lows, the bond market is under pressure, long-term yields have surged, and the government is pushing for increased spending. However, tightening policy too aggressively could destabilize the bond market. Markets anticipate a 25-basis-point rate hike by July, with only a modest increase expected thereafter—likely insufficient to support the yen, making this a delicate situation for policymakers.

Events to Watch Tomorrow

• World Economic Forum in Davos, featuring speakers such as IMF Managing Director Kristalina Georgieva and ECB President Christine Lagarde
• Japan's interest rate announcement
• Japan's December inflation data
• Preliminary January PMI for Japan
• Taiwan's December industrial output
• UK December retail sales
• UK preliminary January PMI
• Speech by Bank of England's Megan Greene
• Eurozone preliminary January PMI
• Canada's December retail sales
• Final January readings for U.S. University of Michigan inflation and consumer expectations

Interested in receiving the Trading Day newsletter in your inbox each weekday morning? Subscribe here.

Written by Jamie McGeever; Edited by Nia Williams