- Putin announced a lower threshold for using nuclear power against Ukraine.
- Wall Street ended Monday up as traders eagerly awaited Nvidia’s earnings.
- Markets are pricing a 61% chance that the Fed will cut in December.
Equities were set for a red day on Tuesday as risk appetite plunged amid worries of an escalation in the Russia-Ukraine war. Meanwhile, stocks ended high in the previous session due to optimism ahead of Nvidia’s earnings report.
Russian President Vladimir Putin surprised markets on Tuesday by announcing a lower threshold for using nuclear power against Ukraine. This move follows missile attacks from Ukraine. The announcement was directed at the US, which has been arming Ukraine. Nuclear weapons would escalate the war between Russia and Ukraine and cause massive destruction. Such an outcome would impact the global economy. As a result, risk appetite plunged as investors sought safety away from equities.
Meanwhile, Wall Street ended high Monday as traders eagerly waited for Nvidia’s earnings report. Nvidia is one of the magnificent seven that has been the main driver of gains in the equities market this year. The company has consistently reported better-than-expected earnings, creating optimism around the AI industry.
At the same time, Tesla shares rallied over 5% after reports that Trump’s team was working to reduce US self-driving car laws. Such an outcome would benefit the company and lower the barrier to entry into the self-driving space.
Equities are recovering slightly after significant losses last week. Before that, the Trump trade had powered a rally to new highs as investors priced his policy changes. Lower taxes and tariffs on imported goods would improve business conditions and raise demand for US goods. This would benefit local companies and drive the equities market higher.
However, with high tariffs on cheap goods from China, US consumers will be forced to buy more expensive US goods. Therefore, consumer prices will increase. At the same time, higher demand will eventually drive prices up. A spike in inflation will discourage the Fed from cutting rates to spur growth. Instead, policymakers might prefer to pause or even increase interest rates to keep the economy from overheating.
Fed rate cut bets (Source: Bloomberg)
High borrowing costs are bearish for equities. Therefore, although Trump’s policies might boost demand in the short term, the Fed might have to curd excessive growth in the long run, which will hurt the stock market. Currently, markets are pricing a 61% chance that the Fed will cut in December. Inflation figures, which aligned with expectations, boosted confidence in a December rate cut.
