German Political Shake-up and US Tariff Threat Hit DAX

Germany's political turmoil intensified as Chancellor Scholz dismissed Finance Minister Lindner, collapsing the ruling coalition and triggering likely snap elections. This political instability weighed on German equities, with the DAX dropping 1.13% as the risk of a Trump-led US blanket tariff on European goods added pressure. Meanwhile, European markets await interest rate decisions from the Fed, BoE, and other central banks amid concerns over inflationary policies.

Equities

The FTSE 100 slipped 0.1% as losses in homebuilders and miners offset broader market optimism following Donald Trump’s return to the US presidency.

Persimmon, a major UK homebuilder, fell 8.6% after expressing concerns over higher costs projected for 2025, which weighed heavily on the sector as the FTSE 350 housebuilder index dropped by 4.1%.

Precious metals miners also faced declines, pulling the FTSE 350 mining index down 2.3% as gold prices retreated from recent highs. In contrast, equipment rental firm Ashtead gained 5.5% on expectations of benefiting from Trump’s pro-growth stance. Retailer Marks & Spencer rose 3.8% after a stronger-than-expected 17.2% rise in first-half profits, with management forecasting continued progress.

On Wall Street, US indices soared to record highs. The S&P 500 rose 2.5%, the Dow Jones Industrial Average jumped 3.6%, and the Nasdaq climbed 3%. Tesla surged 15%, bolstered by Elon Musk’s open support for Trump, with investors betting on favourable government treatment and a potential new commission led by Musk aimed at cutting federal spending. The financial sector also saw strong gains as the S&P 500 bank index rallied 10.7% with expectations of deregulation and lower taxes.

Elsewhere, the cryptocurrency market saw Bitcoin reaching an all-time high above $76,000, reflecting optimism that Trump’s policies would be crypto-friendly. Trump-linked stocks, such as his media company Trump Media & Technology Group, rose by nearly 6%, while the CBOE Volatility Index, often viewed as Wall Street’s fear gauge, fell by 21% as election uncertainty eased.

Treasury yields rose sharply, with the benchmark 10-year note climbing to 4.43%, while the 30-year yield increased by 20 basis points, reflecting investor concerns over potential deficits under Trump’s fiscal policies. The dollar strengthened against major currencies, with the euro down 1.8%, its biggest drop since 2016’s Brexit vote, and the yen weakening as the US currency saw its largest daily gain since March 2020.

Forex & Commodities

The US dollar eased slightly after a strong post-election surge, hovering near a four-month high of 105.44, while the euro edged up 0.11% to $1.0742, recovering from a three-month low. The British pound also rose, climbing 0.37% to $1.2927. The dollar had rallied amid expectations that Trump’s re-election could result in a slower pace of Fed rate cuts, a sentiment reinforced by a jump in US Treasury yields, with the 10-year yield reaching a multi-month high. Investors now await the Fed's policy decision, where a 25-basis-point rate cut is anticipated, while the Bank of England is also expected to reduce rates.

Gold, impacted by a stronger dollar, dipped to a three-week low, trading down 0.1% at $2,657.65 per ounce, extending its retreat from last week's record high of $2,790.15. US gold futures similarly declined by 0.4% to $2,665.20.

In the oil market, Brent crude ticked up by 0.39% to $75.21 per barrel, while US WTI crude rose 0.25% to $71.87. Oil prices initially fell due to the stronger dollar but were buoyed by potential supply risks as Hurricane Rafael prompted a shutdown of 17% of crude production in the Gulf of Mexico. Concerns also linger over possible sanctions on Iranian oil under Trump, potentially cutting supply by up to 1 million barrels per day.