While US stock indices reach new historical highs, bolstered by Donald Trump's victory in the presidential election, European markets struggle to keep pace. This election is not favorable news for Europe, and the reasons are evident. The starting points diverge significantly: the US economy is already robust, driven by strong consumer spending, and Trump's economic agenda, including tax cuts and deregulation, is expected to boost American corporate profits.
In contrast, Europe faces a more challenging environment. Economic recovery remains fragile, with consumers opting to save rather than spend. Politically, the continent is weakened, as its two largest economies, Germany and France, grapple with significant political uncertainties. Moreover, external headwinds, such as a weak global manufacturing cycle, disappointing stimulus efforts in China, and potential tariffs imposed by Trump, further complicate the outlook. However, succumbing to excessive pessimism would be unwise. The situation is not as dire as in 2016. Central banks in developed countries have initiated a rate-cutting cycle, and China may accelerate its stimulus to counterbalance measures from the Trump administration. Additionally, European companies operating in the US stand to benefit from reduced corporate tax rates abroad.
Trump's victory has undoubtedly dampened European market sentiment, leaving perplexed investors to shift exposure from Europe to the US. However, one could argue this decision might come too late. Under these circumstances, it is difficult to envision European markets outperforming their US counterparts in the near term. Yet, European equities retain significant strengths. Corporations and households are financially sound. Following Europe’s underperformance relative to the US, valuations have become exceptionally appealing. Even excluding the "Magnificent Seven", European stocks are trading at a 50% discount compared to US stocks, with a yield of 3.5%.
At some point, investors will inevitably turn to the attractive opportunities offered by European stocks, often unfairly dismissed. But that moment is unlikely to come just yet.
Gold is a complex asset capable of exhibiting odd behaviors depending on market phases. At times seen as a currency, at others influenced by interest rates or sought after as a safe haven during periods of stress, its analysis can be perplexing. Recently, its correlation with currencies, particularly the US dollar, has been dominant. This explains why the dollar’s movements currently dictate the behavior of the yellow metal. In this context, the implications of Donald Trump’s election as President of the United States play a pivotal role. His protectionist agenda favors a strong currency, supported by high long-term interest rates. Moreover, recent doubts regarding further rate cuts by the Federal Reserve are amplifying this dynamic. This has led to a rapid appreciation of the Dollar Index (DXY), a trend that may persist, exerting downward pressure on gold.
While we remain confident that central bank demand for gold will remain robust over the long term, we believe profit-taking on gold positions is justified at this time. Its strong performance since the beginning of the year makes it an ideal candidate for reducing exposure while waiting for uncertainties to dissipate.
The likelihood of the Federal Reserve cutting interest rates once again in December is diminishing. Donald Trump's election as US President raises significant concerns about the inflationary impact of his proposed reforms, which could complicate the Fed's task considerably in 2025.