US benchmarks led by tech rose on Wednesday after a benign CPI print and release of the Fed minutes cemented expectations for a rate cut next week. The reaction in the bond market was very different, however, with yields rising across the curve. Financial markets seem divided over the future direction of inflation. The US dollar rose while precious metals and commodities were higher. Bitcoin climbed back above $100k while Comex gold futures rose to $2755.

The Dow Jones dipped 0.22%, the S&P 500 gained 0.82% to 6084, while the Nasdaq Composite jumped 1.77%. The Russell 2000 added close to 0.5%. Mag 7 stocks led the rally with growing optimism on Wall Street the Fed will deliver another rate cut next week despite the consumer price index rising 0.3% in November for the fourth-straight month, while core CPI, which excludes volatile food and energy costs, rose by the same amount. The core gauge was up 3.3% from a year before, in line with estimates but well above the Fed’s target level. Investors shrugged this off, with the Xmas rally on track to deliver a strong December with the new year just over two weeks away.

The Bank of Canada lowered its rate by half a percentage Wednesday, its second straight outsized cut. Other central banks are also expected to lower rates, and in some cases cut faster and deeper than the Fed. The ECB and Swiss National Bank are likely to follow suit on Thursday. Meanwhile, China’s two-day Central Economic Work Conference is expected to map out policies for next year, following strong fiscal and monetary stimulus signals from top leaders this week.

The reaction in the US bond market was swift to the elevated inflation print, with the long end of the curve rising sharply. The 10yr and 30yr rose 5 bps to 4.27% and 4.48%. The bond market is still pricing in a rate cut next week, albeit at a much slower pace of easing next year. Inflation is proving sticky, and the jury is still out in terms of what impact the Trump administration will have next year after assuming office. Wall Street doesn’t appear too worried however with the volatility index or VIX dropping below 14.

The dollar rallied after a report that Chinese leaders are considering allowing their currency to weaken as they brace for higher tariffs under a second Donald Trump presidency. Competitive currency devaluation seems to be the way most countries will position against the tariffs. Commodities were higher with WTI and Brent crude jumping 2.7% to $70.48 and $73.68. The Biden administration is considering new sanctions on Russia’s oil trade, a move that could tighten the market. The White House also warned that Russia may fire another intermediate-range ballistic missile at Ukraine, after what Moscow said were strikes on its territory with US-supplied weapons. Comex gold added +1.3% to $2753 while silver futures lifted to $32.80.

Sometimes, good news is bad news in the stock market especially when it comes to indicators like investor sentiment. Contrarian investing is exactly what it sounds like — it’s an investing strategy that deliberately trades in opposition to the prevailing investor outlook. At Fat Prophets, we have, on many occasions over the decades, taken the opposite side to the prevailing view. Contrarian investors typically sell in a bull market and buy during a bear market when assets are very depressed. Warren Buffett aptly summarised the contrarian strategy with his famous quote “attempting to be fearful while others are greedy and to be greedy when others are fearful.

We did this several years ago in Japan when the Nikkei was only just exiting a multidecade bear market. Valuations were pulverised following thirty years of deflation and periodic recessions. For example, we were able to buy the Japanese banks at price-to-book ratios of below 0.4X. This year, we have been focused on China, where equities sell for valuations also at multidecade lows. Well-known economist Ed Yardeni also has a similar philosophy.

While the S&P 500 has continually hit new record highs, driven by expectations around the incoming Trump Administration – I have called out the nosebleed valuations where a lot of the good news on the economy next year has been priced into the market already and brought forward. At some point, there has to be a correction in US stocks. I continue to see relative safety in stock markets outside the US, given much lower valuations.