FACTSHEETS & FULL REPORTS

AMERICAS

MarketScape

Reflections on the 2024 Election:

The people have spoken. While there are still some unknowns, the contours of the American government that will be seated next January are reasonably clear. Here is our early take on how the election results will affect the American economy:

• As of this writing, it appears likely that Republicans will control the White House and both houses of Congress. This outcome will invite a more aggressive policy agenda.

• More expiring provisions of the Tax Cuts and Jobs Act (TCJA) of 2017 are likely to be extended. While there are procedural rules in Congress that limit the impact that fiscal programs can have on budget deficits, we expect annual shortfalls to be higher than previously anticipated.

• Tax relief will boost economic growth in the short term, but not in the long term. A lighter regulatory touch for some industries may also support growth, but those effects are more difficult to estimate.

EUROPE

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• Increases in tariffs and reductions in immigration are more likely and could be more extensive under unified government. However justified these measures might be, both will add to inflation.

• As a result of all of the above, interest rates are likely to be higher for longer than they would have been under a divided government. Look for friction between the administration and the Federal Reserve to re-emerge.

ASIA

PACIFIC

Challenging outlook for EU equities amidst economic headwinds and geopolitical uncertainty:

• Outlook for European equities appears challenging, with JPMorgan expecting the EuroStoxx 50 to remain range-bound versus stronger US market (Reuters). Europe's underperformance already stark, with STOXX 600 up just 7% this year compared to 25.7% rise in S&P 500. Broker cited potentially weaker growth outlook and increased geopolitical uncertainty, including rising tariff risks, as factors that could keep European stocks struggling. However, Goldman Sachs sees some potential offsets, such as European companies benefiting from stronger US dollar and those with significant US exposure potentially gaining from tax cuts and deregulation. JPMorgan also sees small-caps as an area that could outperform, similar to 2016, and have introduced an overweight value versus growth trade. Goldman Sachs also downbeat on Q3 reporting thus far, with earnings surprises dropping into negative territory when Financials excluded. Moreover, analysts had reduced estimates by 3% in Q3, before the start of the season. Earnings trends seen broadly negative. Overall, EU equity market expected to remain under pressure, with S&P 500 potentially staying supported into year-end before potentially taking cues from bond yields and priorities of new US administration.

ECB rate cut outlook shifts amid Trump tariff concerns and inflation risks:

• The threat of potential US tariffs under Trump presidency prompted markets to price in more aggressive ECB rate cut cycle. ECB hawk Holzmann the latest official to express concern about Trump's likely implementation of high tariffs against China and significant, though lower, tariffs against Europe. Holzmann indicated December rate cut possible, but not guaranteed, despite three cuts since June (Kleine Zeitung). Market expectations for 50-bps cut in December dampened by stronger Eurozone inflation data, but focus has shifted to February's meeting, with a 30% probability of a larger cut contingent on US administration's trade policies. Looking ahead, analysts expect downward revisions to ECB inflation forecasts in December, with BNP Paribas warning of "non-negligible risk" that temporary sub-2% inflation could become persistent. Risk seen heightened by Eurozone's collective bargaining processes, covering over 75% of employees, where negotiated wages correlate strongly with past inflation after a nine-month lag, potentially complicating ECB policy decisions.

UK luxury goods industry warns on trade war risk:

• The London Times reported UK luxury goods manufacturers concerned they will become collateral damage if there is a trade war caused by US tariffs. Article highlighted in 2019, a long running dispute regarding government support for Airbus and Boeing between the EU and the US ended up hurting UK luxury goods names. Industry group Walpole said it understands reasons for the tariffs to encourage foreign businesses to invest in the US, but most British luxury names are unable to (YahooFinance). Santander Trade Barometer shows half of UK businesses are prioritizing international trade as a key growth driver, highlighting the outsized impact trade tensions could have on UK exports. In addition, a survey by Boston Consulting Group found 72% of FTSE 100 firms list threats to supply chains among their principal risk. To mitigate for these risks, nearshoring and reshoring plans have gained traction. This has been in part driven by the problems during the Covid pandemic and other geopolitical tensions. Portugal, Czech Republic, and Poland popular nearshore locations, but some thoughts it would not mitigate cost of tariffs.

Latest China policy measures disappoint, but hope remains for meaningful fiscal response:

• China NPC Standing Committee meeting considered to have disappointed market hopes for a meaningful response. Main disappointment stemmed from absence of details on consumption stimulus, bank recapitalization and housing inventory de-stocking. However, economists took more nuanced view with estimated CNY500-600B in reduced interest burden seen reducing fiscal pressure on local governments. Moreover, China did pledge more forceful fiscal policy next year with economists anticipating focus on consumer goods trade-in and equipment upgrade programs and increase in social welfare spending. Strategists mixed on implications for equity outlook with UBS expecting more volatility ahead amid ongoing absence of consumer stimulus and looming threat of US tariffs. From a corporate standpoint, earnings recovery has been tepid with Morgan Stanley anticipating continued weakness without forceful reflationary measures. Attention shifts to December Central Economic Work Conference, which may offer more clarity on size and composition of fiscal stimulus in 2025

China deflation pressures persist:

• China October CPI inflation fell to 0.3% y/y from prior month's 0.4% (also consensus). Main drag came from m/m fall in food and energy prices. Excluding volatile items, core inflation rose to 0.2% from 0.1%. Drop in autos/EVs and household appliances were another drag, illustrative of weak domestic demand. PPI shrunk 2.9% y/y, worse than prior month's 2.8% and consensus 2.5%, marking biggest drop in 11 months amid fall in global energy prices and sharper decline in consumer goods prices. Continued deflation pressures contrasted with stronger manufacturing and trade data for October, underlining weak household sentiment and excess supply. Takeaways broadly concurred data underscores need for additional measures to revive domestic demand and kickstart reflation recovery. From fiscal standpoint, economists highlighted consumer goods trade-in and equipment upgrade programs while in terms of monetary policy PBOC has signaled further rate cuts by year-end.

BOJ members saw need to conduct policy with caution amid uncertainties:

• BOJ October Summary of Opinions showed basic view remains that policy normalization will continue if outlook for economy and prices is realized. However, there were varying views on pace of rate hikes amid need to monitor market developments and outlook or overseas economies, particularly US. One member said it cannot be judged that markets are stabilizing with US interest rates and dollar having appreciated amid reduced hard landing risk and speculation surrounding election. One highlighted need to for policy to proceed with caution given domestic and external uncertainties. Given BOJ/Fed policy divergence, there was a view policy normalization could be hindered if rate hikes trigger market shocks. However, others expressed view that BOJ should consider resuming rate hikes after pausing to assess developments in US, and stressed importance of communicating that policy normalization can continue in a gradual manner if economic and price outlook is realized.

China semis rally following report US ordered TSMC to halt shipments of AI chips to China:

• China-listed semiconductor stocks seeing big gains on Monday with SMIC (981.HK) a standout in Hong Kong. Comes after Reuters cited person familiar with the matter who said US ordered TSMC (2330.TT) to halt shipments of AI chips to China from Monday. Department of Commerce issued letter to TSMC imposing controls on exports of 7nm chips or more advanced designs to China. FT first reported the news on Friday. Comes after Reuters sources in late October reported TSMC notified US government one of its chips was found in Huawei AI processor, in apparent violation of US export controls. TSMC suspended shipments to Sophgo, a chip designer in China, after discovery of chip that matched one found on Huawei AI processor. Department of Commerce is investigating how TSMC's chip ended up in Huawei's application. TSMC's new export restrictions were seen impacting Baidu (9888.HK) and Alibaba (9988.HK), which have made big investments in semiconductors for their cloud applications.