Economy

According to Barclays, long-only equity exposure has increased notably since the election, while hedge funds still appear to have the capacity to enhance their positions. This trend is particularly evident in global macro and multi-strategy hedge funds, which have shown limited activity in re-grossing their investments. Despite a sell-off in the bond market, bond funds have not shown signs of a large-scale exit.In the wake of the election, the US dollar has strengthened, leading speculative investors to amplify their short positions in other global currencies, reflecting a growing belief in US economic outperformance.Systematic funds, which include Volatility Control, Commodity Trading Advisors (CTAs), and Risk Parity funds, have recently reduced their long positions in equities, aligning their allocations closer to historical averages. Volatility Control funds have the potential to increase their equity exposure, but any inflows are expected to be incremental, given the volatility anticipated with the implementation of President Trump’s policies. CTAs have notably taken a large short position in the Russell 2000 index, while maintaining a relatively higher position in the NASDAQ index. With rising rates and volatility in the bond market due to inflation concerns, CTAs have also established significant short positions in bonds, and Risk Parity funds have similarly decreased their allocations.The strong US dollar post-election has led to CTAs taking extended long positions on the currency, particularly against the euro. However, recent benign inflation data has created conditions that could lead to a partial reversal of these extended positions in bonds and the EUR/USD currency pair.The EEI aims to provide insights into the underlying dynamics of the stock market by analyzing derivatives flows, including volatility technicals and option flows. Despite recent downturns in the equity market, the EEI indicates a level of investor optimism not seen since the dot-com bubble of the early 2000s, suggesting that investors should proceed with caution. Current equity positions are largely filled, prompting investors to protect against downside risks while showing skepticism towards significant upside potential. This is reflected in the options market, where there is evidence of increased buying of downside protection and selling of upside potential. Notably, institutional investors, rather than retail investors, have been the primary drivers of call overwriting flow, with the supply of gamma from buy-write funds remaining at historically significant levels. Additionally, the positive intra-day auto-correlation signals that dealers are short in this environment.This article was generated with the support of AI and reviewed by an editor. For more information see our T&C. More

The report outlined the reasons behind the firm’s belief in the dollar’s continued strength. Wolfe Research had initially identified a stronger U.S. dollar as a primary investment theme at the beginning of the year. The firm’s stance remains unchanged, as they foresee the currency gaining further ground.Wolfe Research also addressed the future of interest rates, particularly the U.S. 10-year yield, which has been primarily driven by the term premium since mid-September of 2024. The firm anticipates that rates will gradually decrease throughout 2025. This forecast is based on inflation moving closer to the Fed’s 2% target, which could lead to additional rate cuts, and a reduction in term premiums following a significant increase due to concerns over Trump Administration policies.In light of the expected stronger dollar, Wolfe Research has provided a screening of S&P 500 companies that generate a high percentage of their revenue from outside the United States. These companies could potentially experience weaker growth due to the currency implications.The report serves as a guide for investors who might be considering the impact of currency strength and interest rate changes on their portfolios, specifically targeting companies with significant international exposure that may be affected by these macroeconomic trends.This article was generated with the support of AI and reviewed by an editor. For more information see our T&C. More

ORLANDO, Florida (Reuters) -As Donald Trump begins his second term as U.S. president, currency speculators are giving the dollar their strongest backing since before he was first given keys to the White House.The question now is whether this signals more USD strength ahead or marks the peak of the current cycle for the “mighty dollar”, as Trump referred to the greenback late last year.The bullish dollar trade has had a remarkable run since late September when investors began betting on a stronger U.S. economy, ‘higher for longer’ U.S. interest rates, and a Trump victory. In the three and a half months since then, Commodity Futures Trading Commission funds have flipped a leveraged net short dollar position against major and key emerging market currencies worth around $15 billion to a leveraged net long position worth over $35 billion. That’s the biggest ‘long’ since January 2016. A long position is essentially a bet that an asset will rise in value, and a short position is a wager its price will fall.At the same time, the dollar index, a measure of the dollar’s value against its G10 peers, rose 10% to its highest level in more than two years, posting multi-year peaks against sterling and the Canadian dollar as well as record highs against emerging market currencies like the Brazilian real and Indian rupee.As the ‘Trump 2.0′ era begins, the dollar index is some 20% higher than its average over the past quarter of a century and at levels rarely seen since the 1980s. As Societe Generale (OTC:SCGLY)’s Kit Juckes notes, the dollar might be “mighty” but may also be “getting a little bit ahead of itself.”TARIFF TENSIONS COOL?Analysts at Morgan Stanley (NYSE:MS) agree, announcing on Friday that they were turning bearish on the dollar and recommend selling it against the euro, sterling and yen. They argue that most of the economic fundamentals and dynamics that have strengthened the dollar recently – and there have been many – are fully priced into the dollar’s exchange rate or even over-priced in some cases.They suggest that Treasury yields have topped out, the “U.S. exceptionalism” narrative has little juice left in it, investors are too optimistic on the size and scope of Trump’s dollar-friendly tariffs, and the doom and gloom surrounding Europe’s fortunes is overdone.Put all that together, and the near-term outlook for the dollar isn’t all that rosy, at least from a tactical if not long-term fundamental perspective, especially with fund and investor positioning so one-sided.As Morgan Stanley’s FX strategists wrote on Friday, “we acknowledge that there is considerable uncertainty about the sequencing and outcome of U.S. policy. But in the near term, we think the asymmetric risk clearly favors dollar weakness alongside lower yields.”Their take on the dollar certainly isn’t unanimous. For example, analysts at Goldman Sachs last week upgraded their bullish dollar outlook citing continued U.S. economic outperformance, supportive Treasury yields, and the belief that the dollar-positive impact of Trump’s expected tariffs has not yet fully been priced in.Still, given speculators’ stretched dollar positions, it might not take much to send the “mighty dollar” sliding from this lofty height.And right on cue, a Trump administration official on Monday said that tariffs will not be slapped on U.S. trading partners immediately. This pushed the dollar down more than 1%, putting it on track for its worst day since August. (The opinions expressed here are those of the author, a columnist for Reuters) (By Jamie McGeever; Editing by Andrea Ricci) More

“We regret Mr. Trump’s announcement to leave the Paris Agreement, which was not a surprise,” Villeroy, who is also the French central bank chief, said in an interview with Bloomberg TV from the annual gathering in Davos, Switzerland.Even before Trump returned to office on Monday, the U.S. Federal Reserve withdrew from the Central Banks and Supervisors Network for Greening the Financial System, a group launched in 2017 to police environmental risks in finance. But Villeroy said the group, which still has more than 140 members, “is more committed and active than ever.” More

Prices in the food category moved to minus 1.0% after posting 0.0% in November. In the non-food category, prices changed to minus 2.9% on the month from minus 3.1% in November.Inflation is likely to remain low in the next six months after Sri Lanka reduced its household power tariffs by 20% earlier this month. Under the latest revision, industries will get a reduction of 30% while businesses in the tourism sector, a key foreign exchange earner for the island nation, will see their power prices slump by 31%. “We are likely to see inflation reach positive territory of about 2%-3% by mid-year,” said Shehan Cooray, head of research at Acuity Stockbrokers.Sri Lanka’s central bank also expects inflation to reach their target of 5% by mid-2025. Sri Lanka suffered record inflation after its worst financial crisis in decades triggered by a record fall in dollar reserves pummeled the economy in 2022.Helped by a $2.9 billion International Monetary Fund (IMF) program the island nation has posted a rebound and is estimated to have grown by 5% last year, latest central bank data showed. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The EU urgently needs to classify a substance used to line furnaces and kilns for making cement, glass and steel as a critical raw material or supplies will become hostage to China, the world’s biggest producer of high-end industrial ceramics has warned.Stefan Borgas, chief executive of London-listed RHI Magnesita, told the Financial Times that while magnesite was essential to basic chemical processes underlying Europe’s industrial base, its absence from a list of strategically important materials had disincentivised homegrown production.Magnesite is used to make refractories, materials that allow furnaces to handle extremely high temperatures above 1,200C. Europe imports most of its magnesite from China, which controls two-thirds of global production.“We have enough magnesite in Europe that we could secure supply to the European heavy industries,” Borgas said, adding that EU critical materials designation was helping to boost investment in the mining and processing of lithium, nickel and other metals where China also dominated supply.RHI Magnesita’s plant in Kufstein, Austria More

BENGALURU (Reuters) – The South Korean economy barely grew last quarter as political chaos weighed on consumer spending, according to a Reuters poll of economists who expect the Bank of Korea to cut interest rates next month following a surprise hold last week.Asia’s fourth-largest economy grappled with uncertainty from President Yoon Suk Yeol’s brief Dec. 3 martial law attempt, weakening economic sentiment and sluggish domestic demand which overshadowed the recovery in exports.After only growing 0.1% in the July-September quarter, South Korea’s economy likely expanded a seasonally adjusted 0.2% in Q4, according to the median forecast of 24 economists.On an annual basis, the economy expanded 1.4% last quarter, according to the median forecast of 25 economists polled Jan. 15-20, barely changed from 1.5% in the previous quarter.”We expect Q4 GDP data to show lackluster growth. High-frequency indicators point to domestic demand weakness, particularly in December as political events hurt consumer and business confidence,” said Krystal Tan, an economist at ANZ.Exports rose 6.6% in December compared to a year earlier. Semiconductor exports increased 31.5% during the same period.The Bank of Korea (BOK) unexpectedly held its key rate steady on Jan. 16 to prevent the Korean won – which fell more than 12% last year – from weakening further, as political instability undermined investor confidence. The currency has seen a modest gain since the decision.Although currency stability took precedence over domestic demand concerns in last week’s meeting, BOK Governor Rhee Chang-yong indicated a rate cut was still on the table.All 25 economists in a Reuters snap poll taken after the BOK’s January decision expected it to lower borrowing costs by 25 basis points in February and median forecasts showed a total cut of 75 basis points by end-Q3.”Even if the USD/KRW climbs back, as long as the current political situation does not worsen and it is driven more by the global dollar strength, the BOK is likely to deliver a rate cut in February,” noted Min Joo Kang, senior economist at ING.”After that, the BOK will keep a close eye on political developments, growth, inflation, and the won to gauge when to cut rates.”The BOK has lowered its 2025 economic growth projection from 1.9% in November to a range of 1.6% to 1.7%, reinforcing the rate cut view. More

WASHINGTON (Reuters) – President Donald Trump did not immediately impose tariffs on Monday as previously promised but directed federal agencies to “investigate and remedy” persistent U.S. trade deficits and unfair trade practices and currency manipulation by other countries. Trump, sworn in on Monday, said in his inaugural address the U.S. would collect “massive amounts” of income from foreign trade duties as his administration works to rebuild American industry.”Tariffs are going to make us rich as hell,” Trump later told supporters at Capital One (NYSE:COF) Arena in Washington. “It’s going to bring our country’s businesses back that left us.”His first day reprieve signals a possibly more deliberative approach to imposing tariffs, an issue that has shaken global policymakers and investors, and prompted a relief rally in global stocks and key foreign currencies against the dollar.While Trump mentioned no specific tariff plans in his inaugural address, he and members of his cabinet said they were coming, to be collected by a new agency called the External Revenue Service.Trump added that his policies would make America “a manufacturing nation once again.”In a broad presidential trade memo draft seen by Reuters, Trump also directed federal agencies to assess China’s performance under the “Phase 1″ trade deal he signed with Beijing in 2020 to end a nearly two-year tariff war.The deal required China to increase purchases of U.S. exports by $200 billion over two years, but Beijing failed to meet the targets as the COVID-19 pandemic hit.”China’s adherence to this agreement will now be assessed, to determine whether enforcement or changes are required,” the memo reads.DAY ONE REPRIEVEDuring his election campaign, Trump vowed to impose steep tariffs of 10% to 20% on global imports into the U.S. and 60% on goods from China to help reduce a trade deficit that now tops $1 trillion annually. He also vowed to impose 25% duties on goods from Canada and Mexico on his first day in office, if they failed to clamp down on the flow of illicit drugs and migrants entering the U.S. illegally.Such duties would tear up longstanding trade agreements, including the U.S.-Mexico Canada Agreement (USMCA) upend supply chains and raise costs, according to trade experts.The memo directs agencies to ensure that USMCA and other trade agreements “prioritize American workers, farmers and businesses,” signaling plans for a 2026 renegotiation. Some industry groups and trade lawyers in Washington had expected Trump to invoke the International Emergency Economic Powers Act, a law with sweeping powers to control imports, to impose broad tariffs.But Trump will coordinate closely with Congress on tariff measures, a senior administration official said, downplaying differences of opinion within his fledgling cabinet on how quickly to enact Trump’s promised tariffs.The source said that Trump’s Commerce secretary nominee, Howard Lutnick and his nominee for Treasury secretary, Scott Bessent, would push Trump’s trade agenda forward soon, but gave no specific timetable.RELIEF RALLY The U.S. dollar slumped broadly on the news against a basket of major trading partners’ currencies, with particularly large upswings in the euro, Canadian dollar, Mexican peso and Chinese yuan. MSCI’s measure of global stock markets rose. U.S. financial markets are closed for the Martin Luther King Jr. Day holiday.Canadian Finance Minister Dominic LeBlanc told reporters in Ottawa that it would be a positive step for the U.S. to study bilateral trade ties rather than impose tariffs. Industry groups also expressed relief at the reported lack of immediate duties.”U.S. businesses would welcome a deliberative approach that identifies unfair trade practices and helps Americans succeed in the global economy,” said Jake Colvin, president of the National Foreign Trade Council, which represents a broad swath of large American companies on trade matters.Trade analysts said they still expect Trump to press ahead with a global tariff early in his administration.”The universal tariff was a core part of the economic plan he ran on and I think he’s going to do what he said he would,” said Kelly Ann Shaw, a former White House trade adviser during Trump’s first term.”This is an idea he’s supported for a long time,” Shaw, now with the Hogan Lovells law firm, said in an interview last week. More