It has been a rough ride for markets since the Federal Reserve meeting last month, but the chance of a bullish reversal in markets after Donald Trump’s ­inauguration is growing.

At one point on Monday the S&P 500 had erased all its post-election gain. The US stocks benchmark was down more than 5 per cent from its record high of 6099.97 points that it reached in early December. S&P 500 volatility spiked to 22 per cent, its highest point since the Fed meeting. Last week Goldman Sachs warned that US stocks were “priced for perfection”.

Amid growing risk aversion in global markets, the Australian dollar hit a near five-year low of US61.31c, down more than 10 per cent since late September due to a relatively stronger economic performance in the US and ongoing concern about the outlook for China’s economy.

The US dollar has soared about 8 per cent in that time as the 10-year US Treasury yield has jumped more than 1 percentage point to hit a 15-month high of 4.8 per cent.

It has been exacerbated by a strong economy – highlighted by a strong US non-farm payrolls report on Friday – and inflation risks from Donald Trump’s plans to lift tariffs, slash immigration and cut taxes expected US jobs data. But the sell-off in bonds has been driven by a widening term premium – the extra risk compensation investors demand for owning long-term versus short-term bonds.

The US 10-year Treasury term premium estimated by the New York Fed has shot up to a more than 10-year high near 65 basis points, versus about minus 27bps in mid-September.

But on Tuesday the risk aversion and US dollar buying showed early signs of peaking after yet ­another report indicating the ­incoming US administration could use a measured approach to tariffs.

Members of president-elect Donald Trump’s incoming economic team were discussing slowly ramping up tariffs month by month, a gradual approach aimed at boosting negotiating leverage while helping avoid a spike in ­inflation, Bloomberg reported, citing unnamed sources.

Bloomberg’s US dollar index fell about 0.4 per cent against most currencies after the report. The US 10-year bond yield fell as much as four basis points to 4.76 per cent.

Traders on the floor of the New York Stock Exchange on Friday. Picture: AFP
Traders on the floor of the New York Stock Exchange on Friday. Picture: AFP

S&P 500 futures jumped 0.5 per cent and Australia’s S&P/ASX 200 index rose as much as 0.8 per cent, but had trouble holding onto its rise. China’s CSI 300 index rose about 1.4 per cent.

One idea was a schedule of graduated tariffs increasing by about 2-5 per cent a month, and relying on executive authorities under the International Emergency Economic Powers Act.

“The proposal is in its early ­stages and has not yet been presented to Trump, the people said – a sign that a monthly stepped approach is early in the deliberation process,” Bloomberg said.

According to the report, Trump advisers working on the plan include Scott Bessent, the nominee for Treasury secretary, Kevin Hassett, set to be director of the National Economic Council, and Stephen Miran, nominated to lead the Council of Economic ­Advisers.

During the 2024 presidential campaign, Trump floated minimum tariffs of 10-20 per cent on all imported goods, and 60 per cent or more on goods from China.

Earlier this month, he attacked a Washington Post report predicting that his tariff plans would be cut back as “fake news”.

The Wall Street Journal reported Canadian officials are increasingly convinced that Trump will follow through on his recent promises to quickly impose 25 per cent across-the-board tariffs on imports from Canada and Mexico soon after he takes office on January 20.

But the reaction to Tuesday’s report from Bloomberg showed how markets could react next week if Trump’s tariff announcements were less than feared or possibly even if they were no worse than feared.

Ahead of crucial monthly reports on US producer and consumer prices this week, there was plenty of scope for those inflation reports to affect the outlook for US interest rates. And US earnings season fires up this week with reports from major banks including JPMorgan, Goldman Sachs and Citi due.

However, particularly in the event of a further rise in the 10-year bond yield towards 5 per cent or a further sell-off in stocks, analysts will look for a “buy on fact” reaction to Trump’s inauguration.

“I think that in certain markets or assets, quite a lot of the bad news appears to be in the price,” NAB senior FX strategist Rodrigo Catril said.

“For instance, the Aussie dollar has obviously been underperforming and really reflecting its risk sensitivity, and particularly sensitivity in respect to the Chinese outlook.

“So if we were to get a pretty benign comment or mild comment from president Trump in terms of his tariff intentions, then that will be a scenario where you could see a significant unwind for the likes of the Aussie that have been hammered in that regard.

“Of course, at the moment, in terms of what we’ve seen coming from president Trump, the risk is obviously that there will be some tariff announcements.

“But if there was to be the bite being not as scary as the bark, then certainly an unwinding, particularly in some assets or currencies, could be significant. The Aussie would be a prime target.”

Trump’s inauguration starts around noon on Monday (4am AEDT Tuesday). US markets will be closed on Monday for Martin Luther King Day.

This article first appeared in The Australian.

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