Politics has already taken centre stage
It’s only the beginning of 2025, but politics are already taking centre stage. In Canada, Prime Minister Trudeau’s resignation made waves in the media but barely a ripple in financial markets. While it’s tempting to speculate on the impact of political changes, the Canadian dollar’s movements remain tied to more tangible forces, namely the interest rate gap between the Bank of Canada (BoC) and the U.S. Federal Reserve (the Fed). With Canada facing lower inflation and weaker economic growth, the BoC is likely to continue cutting rates more aggressively than the Fed. This divergence keeps downward pressure on the loonie, with US$0.67 now in sight as the lower level for the Canadian dollar in the near term.
South of the border, President-elect Trump’s press conference was a whirlwind of headline-grabbing remarks, ranging from AI investments to wild suggestions like renaming the Gulf of Mexico. The markets will likely continue to struggle with the unpredictability of his policies in the next four years; we’ll have to get used to this once again.
Meanwhile, bond markets extended their sell-off. U.S. 10-year Treasury yields climbed to 4.72%, a rapid 60 basis-point (0.6 of a percentage point) increase within a month. Across the Atlantic, U.K. bond yields surged, with the 10-year yield hitting its highest level since 2008, and inflation-linked 30-year yields topping 2%. Concerns are mounting that U.K. Prime Minister Keir Starmer’s spending plans could trigger a fiscal crisis, further unsettling bond investors.
Higher Treasury yields are becoming a growing concern for equity markets, especially as speculation around Trump’s policy agenda adds to the uncertainty. The key for markets will be whether rising yields reflect stronger economic growth or inflation pressures. In the near term, this environment will pose challenges for risk assets, as investors recalibrate their expectations.
Adding to the turmoil, quantum computing stocks suffered a sharp sell-off following remarks from Nvidia CEO Jensen Huang who suggested that practical quantum computers remain decades away. Shares of leading companies in the space tumbled hard. Nvidia’s own AI-driven optimism couldn’t shield the sector from a harsh dose of reality.
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