US markets rallied on Monday, fueled by cautious optimism surrounding upcoming trade talks and anticipations surrounding the Federal Reserve’s monetary policy. The Dow Jones Industrial Average closed at 47,544 points, a 0.7% increase from the previous day’s close. The broader S&P 500 climbed 1.2% to approximately 6,875 points, while the technology-heavy Nasdaq 100 surged 1.8% to around 25,820 points.
The prevailing bullish sentiment appears linked to the planned meeting between US President Donald Trump and Chinese President Xi Jinping. However, analysts are tempering expectations. Christine Romar, Head of Europe at CMC Markets, cautioned, “While hope prevails, the erratic nature of Donald Trump’s policies means that success, if it comes, won’t be guaranteed until the agreement is finalized and signed”. This sentiment highlights a recurring tension: the reliance on delicate diplomatic maneuvers interspersed with unpredictable leadership decisions that inject volatility into markets.
Beyond trade, speculation regarding the Federal Reserve’s future actions is significantly influencing investor behavior. A rate cut is largely priced in for Wednesday and expectations are rising that the Fed will also halt its balance sheet reduction (Quantitative Tightening), signaling a more expansive monetary policy. This shift, unthinkable just weeks ago amidst tensions between Powell and Trump, underscores the evolving power dynamics and the extent to which the central bank’s actions are now intertwined with political considerations.
However, Romar warned of potential disappointment. “The assumption that the Fed will abandon its cautious stance and embrace a significantly looser monetary policy is far from certain, given recent inflation data. There’s considerable potential for disillusionment among those who are actively trading at the start of this pivotal week”. This highlights a critical vulnerability: the risk that aggressive expectations built into asset prices may not be met, leading to abrupt corrections.
The euro strengthened slightly, trading at $1.1646, with a dollar fetching €0.8587. Meanwhile, gold prices experienced a sharp decline, falling to $3,992 per fine ounce (-2.2%), equivalent to €110.20 per gram. Oil prices also dropped, with Brent crude futures falling to $65.69 per barrel, 25 cents or 0.4% lower than the previous day’s closing price. These movements reflect broader uncertainty and potentially a reassessment of risk given the multitude of political and economic factors at play.
