The uncertainty surrounding the Trump administration's economic policies continues to affect the market, as tariff threats disrupt oil price expectations, gold prices diverge from traditional logic, and Nvidia's performance, while exceeding expectations, causes a downturn in U.S. stocks. These phenomena reflect the market's complex attitude toward policies and corporate earnings. Here is an in-depth interpretation of these phenomena by a Bloomberg columnist.
Oil price conundrum: Trump finds it hard to have it both ways.
Unpredictable and inconsistent economic policies are not only annoying but also hinder business planning. For example, the Trump administration's ambitions regarding oil are relatively straightforward—support production and lower oil prices through 'drill, baby, drill'—as a means to reduce inflation and subsequently lower interest rates. However, when considering how these policies will be implemented, it becomes much more complicated.
Three years ago, when the Russia-Ukraine conflict broke out, crude oil soared to $125 per barrel. Over the past six months, it has hardly ever broken through $80. Trump hopes to push oil prices down further in the face of oversupply and weak demand; while this goal is ambitious, it is not impossible to achieve. However, relentless tariff threats have become a stumbling block. On Thursday, Trump insisted that a 10% tariff would be imposed on energy products exported from Canada to the U.S. next week, causing oil prices to rise by 2% at one point.
In short, Trump’s tariffs on Canadian energy products gave oil prices a 'shot in the arm,' but this is only temporary. Unless significant adjustments occur, crude oil is facing its largest monthly decline since last September. The fundamental issue is that predicting the exact impact of tariff policies will be futile if they remain unclear.
Other policy avenues may offset the impact of tariff uncertainty on oil prices. Trump is determined to end the Russia-Ukraine conflict, and it is believed that this will open the door for more exports from Russia, potentially lowering oil prices.
Natasha Kaneva, head of global commodities strategy at JPMorgan, also believes that Trump may take a lenient stance on sanctions against Iran and Venezuela, which will further increase oil supply. Kaneva stated that due to weak crude oil demand and inventories at decades-low levels, the likelihood of further increases in oil prices is minimal.
Additionally, the replenishment of the Strategic Petroleum Reserve (SPR) may support oil prices over the next five years, but the low government inventory reduces the buffer against the risks of price increases, including escalating geopolitical tensions, delays in deep-water projects, and a significant slowdown in global electric vehicle sales. In contrast, the main downside risks for oil prices include periods of slow global economic growth, increased OPEC+ production, and unexpected increases in U.S. shale oil productivity.
The current supply-demand fundamentals are another reason to expect that tariffs will not push oil prices higher. Global oil demand is expected to increase by one million barrels per day by 2025, a growth rate lower than the expected supply increase of 1.2 million barrels per day from non-OPEC+ countries. However, the alliance's current daily production already exceeds plans by more than one million barrels and has over five million barrels of idle capacity. Bart Melek, head of commodity strategy at TD Securities, believes this makes it unlikely for oil prices to sustain increases.
While long-term tariffs on Canadian energy products could lead to strong and sustained increases in oil prices, OPEC+’s idle capacity and its determination to regain market share, coupled with the possibility that any tariffs imposed by the Trump administration on energy products may be short-lived, will make any further increases in oil prices hard to sustain.
Moreover, falling oil prices will reduce the willingness of drilling companies to increase production. Before 'drill, baby, drill', producers must be confident that they can secure good prices.
Meanwhile, Trump's use of oil as a bargaining chip in tariff negotiations may backfire. Countries like India and Japan, which have large trade surpluses, are scrambling to buy more U.S. liquefied natural gas to appease the U.S. President. As other countries may also join this line, there might not be enough liquefied natural gas supply.
U.S. liquefied natural gas exports are nearing full capacity. Tom Holland of Gavekal Research points out that in December of last year, just before pressure was applied to trading partners, the U.S. Department of Energy predicted that U.S. liquefied natural gas exports would grow from 12 billion cubic feet per day in 2025 to 14 billion cubic feet per day in 2026. Given capacity constraints, more liquefied natural gas orders cannot significantly increase export volumes, and 'export growth often pushes domestic energy prices higher, with minimal impact on the U.S. trade deficit.'
Basic economic principles indicate that Trump cannot have both sides of the coin. Ultimately, the government must choose between policies that lower oil prices (which means reducing inflation and interest rates) and those that raise oil prices to attract oil drilling. Achieving both goals is easier said than done. The market needs to cautiously bet on which policy the government is likely to choose to make oil prices cheaper.
Gold's surge: Just a short squeeze?
How long can this gold bull market last? Even though gold prices haven't truly broken through $3,000 per ounce, this surge has persisted for a long time and ignored all recent macroeconomic drivers.
Since gold does not generate returns and storage incurs costs, gold prices should fall when low-risk assets offer higher yields; conversely, when yields on low-risk assets decline, the disadvantage of non-yielding gold becomes less apparent, leading to an increase in gold prices. In fact, the inverse relationship between the yields of 10-year U.S. inflation-protected securities (TIPS, a type of real yield that accounts for inflation) and gold prices used to be very close. The chart below shows the relationship between gold prices and 10-year real yields from 1997 to 2022 (to clarify the relationship, real yields are inverted):
For 25 years, gold prices seem to have followed real yield fluctuations.
However, after the Federal Reserve began raising interest rates in early 2022, the situation changed. Gold prices and real yields skyrocketed together (in the chart, since the real yield scale is still inverted, they appear to be diverging):
Since the Federal Reserve began raising interest rates in 2022, the relationship between gold prices and real yields has broken down.
Rising U.S. interest rates should not inherently be favorable for gold. However, demand for gold remains extremely strong. The State Street Global Advisors' gold ETF (GLD) has just experienced its largest single-week inflow of funds in history, easily breaking the record set at the onset of the pandemic in early 2020.
Investors poured record amounts of money into major gold ETFs last week.
So where does the demand come from? George Milling-Stanley, chief gold strategist at State Street, noted that buyers are evenly distributed between retail and institutional investors. He attributes the record inflow of funds to a rise in demand for safe-haven assets. From the index compiled by Baker, Bloom & Davis based on news reports, Trump’s 'return' has undoubtedly caused significant uncertainty globally.
What specific policy factors in Trump 2.0 excite the gold market? Physical gold is crossing the Atlantic to the U.S. in record amounts. This is largely to avoid potential tariffs on gold imports in the future, as evidenced by the sharp rise in interest rates paid to borrow gold in the London market. The chart below is created by Longview Economics.
The interest rates paid to borrow gold in the London market have risen sharply.
In addition to tariffs, the gold rush is also fueled by another interesting possibility: U.S. Treasury Secretary Scott Bessent hinted that he would 'monetize the asset side of the U.S. balance sheet for the American people.' This could mean privatization similar to the era of Margaret Thatcher, but experts hope for a different outcome.
Harry Colvin of Longview explained that market rumors suggest 'the Treasury will revalue its gold on the balance sheet at market prices (currently $42 per ounce).' This would increase the value of the gold it holds by about $800 billion, which could be lent to the Federal Reserve. 'Then the Federal Reserve will credit $800 billion to the Treasury's general account, which will become a key source of market liquidity (beneficial for gold prices).'
Mike Howell of CrossBorder Capital points out that this practice has precedent; Franklin D. Roosevelt (FDR) revalued gold prices from $20.67 per ounce to $35 in 1933. This move once provided funding for the 'New Deal' reforms and could similarly aid Trump’s second term.
Some also believe that this new funding could be used to initiate a sovereign wealth fund. However, this claim has issues; primarily, Bessent himself told Bloomberg that the revaluation 'is not what I had in mind.' Other officials have also pointed out that this appears to be an operation that could raise questions and potentially undermine confidence in the Federal Reserve.
If this argument is also invalid, then gold, which may have just undergone a short squeeze, now appears easily influenced by policy disappointments. It’s best to be cautious after this wave of gold enthusiasm.
Nvidia's plummet: A sign of a new phase.
Nvidia (NVDA) reported earnings and sales that exceeded expectations on Wednesday. However, its stock price dropped 8.5% the next day. The company's growth momentum remains astonishing, but investors were spooked by the decline in its strong profit margins, causing Nvidia's market value to drop back below $3 trillion. Since the stock price peaked last month, its total market value has evaporated by $730 billion. Investors would do well to view this as evidence that the demands on large tech companies are changing.
For a long time after the launch of Chat GPT, investors were most eager to buy companies that invested heavily in R&D. Now, they prefer tech companies that can prove their profitability. After a significant stock price adjustment last July, the election again drove the stock prices of the 'Seven Giants' higher, but the potential shift in market sentiment seems to be ongoing.
The surge of the 'Seven Giants' may really be coming to an end this time.
For Nvidia, there may be a long-term issue that investors now also want to avoid companies that make large capital expenditures. Capital expenditures in this field have been booming as executives purchase Nvidia chips to stand out in the AI race.
Joseph Mezrich from Metafoura analyzed three investment strategies over the past three years: buying tech stocks with the highest ratio of R&D investment to sales while shorting those with the lowest ratio; applying the same approach to companies with the highest and lowest ratios of capital expenditure to sales, as well as those with the highest and lowest return on equity. The results showed that since the stock price adjustment last summer, investors have punished those companies with high capital expenditures, instead seeking profitable companies.
Returns from three investment strategies.
Artificial intelligence has entered the 'results phase'. The drop in Nvidia's stock price indeed indicates that investors are now concerned about the company's profitability. This is a healthy shift.
Moreover, an interesting development is that the day Nvidia's stock price plummeted also brought the 'America First' trading strategy back to square one. Since election day, the performance of the S&P 500 index (SPX) has now lagged behind other regions of the world.
Article republished from: Jin10 Data
