Markets wait for Trump, as gold surges to fresh record

Financial markets are calmer this morning, although European equities are still in the red on Wednesday. The key risk event that traders are watching out for is Donald Trump’s speech at Davos, which is scheduled for 1330  GMT.

In advance of Trump’s speech, the gold price has hit a record above $4,800. Although stocks are mildly lower in Europe this morning, there is a notable improvement in risk sentiment. US equity futures are pointing to a higher open for the Dow, the S&P 500 and the Nasdaq later today, after a 2% drop across US indices on Tuesday, which erased the S&P 500’s gains for the entire year.

Investors must be wondering why Donald Trump’s failure to win a Nobel peace prize caused YTD gains to get erased from their portfolios. The President’s erratic policy decisions in the first weeks of this year have triggered a rush to the safety of gold, which hit another record high this morning. We expect stocks to drift and gold to remain elevated, it is higher by more than 2% on Wednesday, as we wait to hear what Donald Trump has to say.

Will the President try to heal relations with his allies, stand shoulder to shoulder with Nato and try to gain control of Greenland’s rare earths through diplomatic means? If he does de-escalate the situation, then the market recovery may continue to take hold. However, if he sticks to his guns about taking Greenland under US control, and if he continues to sideline his closest allies, then risk sentiment could take another dive lower and the gold price could hit $5,000 per ounce.

Aside from the gold price, which is continuing to gain significant safe haven flows, a calmer bond market is also rippling through markets this morning, and dampening volatility. Fear about rapid fiscal expansion in Japan caused Japanese 30-year yields to surge 26bps on Tuesday, a huge move many standard deviations above the mean. This caused a global bond market sell off. The market is clawing back some losses and yields are moderating on Wednesday. The UK yield is down nearly 3bps so far, and Treasury yields are also lower.

Japan’s bond market was soothed by words from the Japanese finance minister who said that tax rises would not lead to more debt issuance. While markets are calmer today, we continue to think that the Japanese bond market remains a risk for financial markets, especially in the lead up to next month’s election. While we do not think that a bond market sell off will lead to Japanese capital flows returning home, it does shed light on country level balance sheets and their vulnerabilities.

The recovery in global bonds has helped UK Gilts brush off stronger than expected inflation for December, which rose to 3.4% from 3.2%. The rise was partly expected, and prices were led higher by airfares and tobacco price increases. However, the bigger picture suggests that UK price growth remains stuck above 3%, and it may not meaningfully fall back towards the BOE target rate until public sector wage growth starts to moderate in the coming months.

It is also worth noting that December price growth is historically volatile. The data has not shifted the dial too much for interest rate expectations in the UK. There are just under 2 cuts expected from the BOE this year, with the first cut expected in April. We think that as long as the BOE is confident price growth will fall, albeit not in a straight line, then the focus will be on the worrying rise in the unemployment rate.

UK earnings growth is also in focus this morning, with Burberry the shining star. It reported comparable sales growth of 3%, with strong growth in China and in Asia more generally. Growth in the US was also up 2%, while sales in Europe were flat. These results are a vote of confidence in the turnaround strategy at the company, which is focusing on the traditional Burberry trench coats and check pattern. The company also said that it had reduced markdowns and had high quality growth, including an increase in demand from Gen Z clients in Asia.

This news has sent the stock price higher by more than 5% today, and it is also having a broader benefit across the luxury sector, in the face of tariff threats from Donald Trump. LVMH is also higher by 1.5%. If sales of luxury in China are rising, who needs the US anyway. Today’s results for Burberry could lead to a broader recovery in the luxury sector, which has had a weak start to the year.

Overall, the focus today will be on Donald Trump’s speech later today. Gold is likely to remain elevated, and stocks could move sideways. The dollar is also picking up from its recent lows, however, we do not expect major moves in the FX market until after Trump has spoken.