Energy, interest rates, German government’s changeover, and Trump victory

As expected, last week both the US Federal Reserve and the Bank of England reduced rates by 25 bps. Fed chair Powell remains optimistic overall, saying inflation is heading in the right direction while the risks to achieving the Fed’s employment and inflation goals are coming into better balance. He emphasized that the labor market remains strong while showing signs of cooling.

With interest rates across most central banks heading lower, and the CME FedWatch futures pricing in one more 25 bps rate cut by the end of the year, global liquidity will continue to push markets higher.

Adding to the bullish sentiment was the recent US election results, leading to a significant increase in stock prices on Wednesday. The Dow Jones rose by 3.6%, and the Russell 2000, which tracks small businesses, jumped 5.8%. We also saw yields on the long bond soar along with the US dollar suggesting a stronger economy under Trump’s leadership. This boost is seen as a relief rally because businesses are hopeful they won’t face higher taxes or stricter regulations as expected from the Biden as well as a Harris administration. Many voters felt relieved that policies from Elizabeth Warren’s group, which could have hurt small businesses, are likely off the table now. Cutting edge companies in the nuclear energy, AI, and Bitcoin/blockchain sectors soared on the news of the Trump victory since Trump together with Elon Musk are both seen as vanguards against corruption, bureaucraZy, regulatory capture, and overregulation.

The pro-crypto administration comes into power alongside a Bitcoin-friendly Congress as well as pressure on Powell to lower rates. Further, during his campaign, Trump said he wanted to make the US the “crypto capital of the planet” and he floated the idea of a strategic bitcoin stockpile. Other governments will likely follow along and create their own stockpiles of Bitcoin to minimize the impact of inflation as QEndless devalues fiat.

During Trump’s first administration, he regularly pointed to the strong stock market as an indicator of his performance as president. This suggests Trump will do whatever he can to make the stock market go up, another tailwind for Bitcoin, as lower rates and QEndless make for higher markets since QE was launched in late 2008.

While there are worries about Trump’s potential tariffs, voters seemed more concerned about sticking with Biden’s economic policies that have caused high inflation and stagnant wages for many Americans. Although wealthy asset owners have done well during Biden’s presidency, most have struggled economically. The middle class has been compromised and many are living paycheck-to-paycheck. The Trump victory will overturn many of these policies which should help bring more balance to the economy with less bureaucracy.

Over in the EU, in a major political shift, Germany’s coalition government has collapsed after Chancellor Olaf Scholz fired Finance Minister Christian Lindner from the Free Democrats (FDP). This decision followed ongoing disagreements over how to handle the economy and led to Lindner and other FDP ministers resigning. Now, Scholz will lead a minority government with the remaining coalition partner, the Greens. The CDU/CSU and SPD parliamentary groups have agreed on a proposal for an early Bundestag election to be held on February 23, 2024. This date has also been agreed upon by the Greens and the FDP. Chancellor Olaf Scholz is expected to call for a vote of confidence in the Bundestag on December 16, 2023. The final decision on the election date will be made by Federal President Frank-Walter Steinmeier.

This development represents a significant shift in the German political landscape, with major parties agreeing to hold early elections in response to recent political developments.

Current polls suggest the CDU (Christian Democratic Union) has the best chance of winning if new elections are held. The CDU, along with its sister party CSU, has called for a reversal of Germany’s nuclear phase-out. The Christian Democratic Union (CDU), currently in opposition, may widen its base by opening to topics further to the right (immigration) as well as economic liberalism (deregulation) in response to Trump’s victory. This could lead to a broader realignment of German political parties and their policy positions.

The pro-nuclear stance of the CDU is in parallel with the growing interest among institutional and large private investors in nuclear energy, as evidenced by the launch of the Triton fund, which focuses on uranium mining and nuclear-related investments. This fund aims to provide opportunities for accredited investors, including family offices, to engage in various aspects of the nuclear supply chain, from mining to reactor development. Family offices looking for stable, long-term investments may find nuclear energy appealing due to its potential for high returns and its strategic importance in energy security.

The ECB may need to force more easy money policies by lowering rates as a consequence of instability in Germany. This will help push markets higher.