Fiscal policy focused on stimulating the economy and the Fed cutting its policy rate will increase the likelihood the economy will stay strong and inflation will remain elevated. This is likely good for stocks and the dollar but bad for bonds. Red sweep and interest rate cuts. Two major policy events in the past week have made the a clouded outlook much more clear. Trump has won the White House and Congress and has made it clear that his political program is focused on stimulating the economy and the Federal Reserve has not changed its signal that it plans to cut interest rates by 125 basis points over the coming year. A shift toward easy policy is great news for the economic outlook, but considering that the economy is already strong, it increases the risk that inflation will remain elevated in the future. The train has already left the station. Investors have sniffed out the shift to more easy policy and put upward pressure on stocks and downward pressure on bonds. Over the past two months, the S&P 500 index has increased by about 8%, while the US 10-year interest rate swap has increased by about 60 basis points. The story about an overly easy policy and a strong economy is centered around the US. In comparison, during the same period, the Stoxx Europe 600 index has drifted lower by a couple of percent, and the euro area 10-year interest rate swap has decreased by about 15 basis points. The bond divergence has strengthened the US dollar by about 4% versus the euro and many other currencies. Expansive fiscal policy and central bank interest rate cuts are shaping the entire financial market. We also see this story affecting asset swap spreads (government bond yield versus swap rate) that have tightened sharply because investors have become more worried about growing sovereign debt. #WikiEXPO2024 #TradingAnalysis #PortfolioInvestment