A positive share price trend in shares is not guaranteed
Three factors could have a significant impact on the financial markets in the coming period.
The first factor is that the US Supreme Court has promised to rule soon on whether Trump's import tariffs were imposed legally. Lower courts have already ruled that this was illegal, but the Supreme Court has the final say on this matter. The general expectation is that at least some of the import tariffs will be ruled illegal.
In itself, this is not a disaster for the government, as the tariffs can still be imposed legally on the basis of other laws. However, this will have to be done in a modified form and it will take some time before this is arranged. This has two important consequences:
- The import tariffs that have already been collected, which were imposed on unlawful grounds, will have to be refunded. This will provide additional fiscal stimulus to the economy and further increase the government deficit.
- It will increase uncertainty among companies, reducing the incentive to invest. In addition, many trade agreements recently concluded between the US and other countries will be in jeopardy. Whereas more fiscal stimulus normally leads to higher economic growth, this uncertainty is actually slowing down growth.
The second factor is US monetary policy. The Fed cut interest rates by 0.25% this week, but at the same time indicated that the period of rate cuts, intended as insurance against low growth, may have ended. From now on, the focus will be on the development of unemployment and inflation. The central bank's current view is that it expects to cut interest rates once more by 0.25% in 2026 and again in 2027. This is based on the expectation that the economy will continue to grow at a moderate pace (around 2 to 2.5%) and that inflation will gradually decline.
The more hawkish stance is hardly surprising, considering inflation is currently still around 3%, above the 2% target, and the labour market appears to be picking up again.
What was surprising, however, was that the Fed will start creating extra money again by buying bonds (QE). This is because reserves in the banking system have fallen too far, which is increasingly limiting lending.
The central bank has indicated that it will buy bonds – and thus create money – until the banks have sufficient reserves again. However, the markets are not convinced. It is possible that the government in Washington has gained so much control over the Fed that its primary goal is to ensure strong economic growth in the run-up to next year's elections. To achieve this, long-term interest rates would have to be pushed down as far as possible.
However, this means that rising inflation must be taken into account. Gold, silver and shares have already reacted in this sense. For longer-term interest rates, however, the message is mixed. With its QE policy, the Fed is pushing down long-term interest rates, while rising inflation expectations are pushing them up.
If the latter prevails, the Fed will become virtually powerless and the creation of extra money will actually be counterproductive. An initial sign of this will emerge when the 10-year US government bond yields break above 4.2%. Confirmation will follow when these yields subsequently rise above 4.5%.
This brings us to the third and final factor. Normally, rising short- and long-term interest rates are positive for the exchange rate of the currency in question. In Japan, however, we see that this can also turn out differently. Higher interest rates are negative for the development of the government deficit. When there are already major concerns about the size of the public debt, these are further exacerbated by higher interest rates.
In almost all cases, the central bank is then forced to finance an increasingly large portion of the government deficit with money it has created out of thin air. In other words, an inflationary policy is pursued. If the ten-year interest rate rises above 4.5% while the dollar falls at the same time, this is a clear warning sign.
