Geopolitics Meets Markets

The Fed’s latest rate cut sparks debate on future policy, prediction market surges, and geopolitical developments—from Trump’s Asia trip to AI investment concerns. Jose Torres breaks it all down.

Mary MacNamara  

Hello everybody and welcome to the weekly Econ podcast Cents of Security. I’m joined here today with our Senior Economist at Interactive Brokers, Jose Torres.

Hi Jose. How are you?

Jose Torres  

Mary MacNamara. How are you doing today?

Mary MacNamara  

I am doing great. Great. So, tell us about yesterday’s fed cut. It seems that the markets were expecting this cut, but everybody was kind of in the doldrums about a possible no cut in December. Is that true?

Jose Torres  

Absolutely. It was a hawkish cut. Folks you know, the Fed came out, gave the 25-basis point reduction, but quelled the enthusiasm that market participants had about additional cuts in future meetings, namely December, Mary December, it was trading as high as 90% in terms of odds that it would be a reduction at that meeting as well.

Now that’s paired back quite a bit down to around 70% or so. Market participants still expecting a cut in December, but not as sure as they were prior to the Powell Pressor forecast Contract enthusiasm related to the Fed Day has been through the roof. On Tuesday, October 28th, we marked a new year to date high 3.36 million contracts. You know, we have a lot of different kinds of market participants engaging in our prediction market. We have investors, speculators, hedgers, arbitrages, and market makers. I like to group the participants in those five buckets, and really we’re seeing a lot of enthusiasm on rate decisions around the world of mainly the Fed, but what’s really been driving this week’s volume?

We’re already above 2 million today, of course, October 28th, we exceeded 3 million, 3.36 million. So, we’re looking to build on these numbers.

If you listen to our earnings call for the third quarter, we mentioned forecast contracts and the significant amount of new instruments that we’ve added, as well as the, a number of transactions that have been growing and really in broad based fashion. When we first got started last year in August, a big, huge boost came from President Trump and Vice President Harris.

Now we’re very excited to notice that we’re seeing broad base participation across a lot of the other economic indicators that we have. So it’s not just elections, economic indicators, government shutdown, fiscal things, national debt, elections have been really a bread and butter. When you, when you consider the, the record days, you know, it’s been elections, but now we’re starting to broaden out and we’re starting to see a lot of interest in other areas as well.

Mary MacNamara  

So also in the news is this Trump Asia trip. So, what are the wins and losses? I know rare earth tariff news, soybeans. What can you tell us?

Jose Torres  

Yeah, so it was a pretty satisfactory meeting, there was expectations that it would be a positive. Negotiation because prior to the meeting in South Korea, you had top diplomats from Beijing and from Washington essentially set the framework so that the two heads of states can go and essentially shake hands and agree on some things.

China agreed to help more on the fentanyl situation. President Trump decided to reduce the tariff there. That was because he imposed a tariff that was directly linked to fentanyl, so there were some positive conciliatory matters happening there. You also had, TikTok was under discussion, allowing China to access more semiconductors under discussion soybean purchases are going to be made Beijing committed to that. But that’s one of one thing we got to wait and see, because remember in Trump 1.0 Beijing committed to huge purchases of soybeans that didn’t necessarily come to fruition at the magnitude that was promised. So generally speaking, those are some of the main takeaways from the meeting.

That was part of the reason why today, on October 30th, you saw investors buy the dip. In the cyclically oriented areas of the market, so the two more cyclically oriented indices out of the four majors. Are the Dow Jones Industrial and the Russell 2000. So all those, the four major benchmarks, other two being the NASDAQ 100 and S&P 500, all four were down sharply in the morning, but then investors start bought the dips in the Russell 2000 and the Dow and that’s because of really strong growth expectations. And those companies in those baskets are more levered to the US economy. And when you see that. Us. China is starting to get along and inflation is running at 3%, mainly due to consumer demand being so strong, pushing up services costs.

That really widens the path for those kinds of firms to do well. Now, the S&P 500 and NASDAQ 100, they’re not recovering today recovering into the green, I should say. There has been some dip buying in those two baskets, but not as much as the former two. And artificial intelligence enthusiasm waned today after Meta and Microsoft delivered some results that weren’t well received by investors.

Wall Street starting a question where these significant artificial intelligence investments are going to be worth it in the long run. Are these hundreds of billions of dollars? Going to generate returns later. You know, that’s top of mind. So, folks decided to trim some technology, but add to the more cyclical sectors like small caps, industrial materials, et cetera.

Mary MacNamara  

Okay, so that was good about Trump with Xi, but what about South Korea and Japan? Didn’t he also go there as well?

Jose Torres  

So this week they, there was a big meeting in South Korea. President Trump closed a deal with South Korea a few days ago. And the new Prime Minister of Japan her framework on politics and on governance and on managing relations between Tokyo and Washington are similar to the late Shinzo Abe who served as Prime Minister while President Trump was serving his first term.

Unfortunately, he was assassinated, but Shinzo and Trump were very good friends. They got along really well. Part of the reason why folks say that their friendship was so strong is because Shinzo really courted Trump and was really considerate and gave him gifts and always made sure that the, the optics were very positive.

And now this new prime minister in Japan, she’s sort of abiding by those same practices. Golden golf ball Trump hats warm ovations upon his arrival, you know Trump essentially told her, listen, I mean, of course exaggerating in Trump fashion, but he pretty much told her, listen, whatever you want, you can have.

When the President Trump says that you can kind of, that’s a signal that relations between the two nations, you know, they aren’t terrible. They’re, they’re doing all right. So.

You know Japanese automobiles are very popular and President Trump sometimes doesn’t like that a lot of the nations where we import cars from, they don’t necessarily take our imports, right? Like you don’t see a lot of Chevrolets, Dodges or Fords in Europe or in Japan, for example. You know, so President Trump is critical of that ‘because he’d like to see more balanced cross border commerce.

Mary MacNamara  

So here’s something I thought was interesting yesterday, is that Chair Powell stated that he does not believe the AI boom is an asset bubble akin to the dot com bubble as big tech companies have huge cash reserves.

But what about the startups and what, what was he getting at? What was he trying to tell the markets?

Jose Torres  

He was trying to calm the markets. You know, this is a, someone that’s traditionally a financier. He worked at Carlyle for a long time. He’s right that a lot of those dot com bubble firms, they weren’t very profitable, and they didn’t have terrific balance sheets. So, they couldn’t weather the turbulence like these firms can.

And that’s really the general belief on Wall Street, is that any kind of correction is going to be short-lived. Or won’t be that significant because these companies actually make a lot of money and AI is not really the only thing they’re doing. These companies have been around for a long time, and they have a lot of other goods and services.

Now the question is, however, if artificial intelligence doesn’t deliver their returns, you know, how much needs to be given back, you know in terms of price advancements.

Mary MacNamara  

There has to be some patience. Right. I think that’s the thing he is trying to suggest a little bit is you got to have patience. There’s R&D involved here, and it’s not going to be just like a next quarter thing. I mean, that just makes common sense, right?

Jose Torres  

Yeah, it’s really, really expensive. That’s really the worry is what if this doesn’t do anything in the end? You know, what if it’s really not that significant? Did we just spend a hundred billion dollars, $200 billion. And the numbers really, they’re really up there.

So that’s ultimately the question.

Mary MacNamara  

What’s going on with this shutdown and what are you seeing in the predictive markets about it and, and what are you hearing?

Jose Torres  

It’s looking like I’m just opening up my forecast trader now. It’s looking like it’s going to continue extend because both sides aren’t necessarily looking to concede to the other.

So yeah, looking like before Thanksgiving. because if you look at our November 21st contract, the yes is 72%. So 72% of participants generally speaking believe that the shutdown will end by November 21st,

Mary MacNamara  

Are people getting a little nervous about the shutdown? From an economic perspective, I would, I would seem so. Because they’re not getting some numbers or is it just more muted?

Jose Torres  

It’s more muted. The Republicans for a long time have wanted to trim government. So, in their mind, in the Republican’s mind, it’s like, well, they’re closed. The government’s closed, and everything seems to be working, so why should we have to negotiate with Democrats?

The markets are doing great generally speaking. I have a little bit of volatility today, post fed October 30th. Bond yields are behaving governments closed in their mind. It’s great.

 And then when you consider that food stamp funding is set to run out in the next few days, that’s another vulnerable part of the population.

Mary MacNamara  

There is a huge concentration of that in the red states, so I would think they’d be getting a little bit of pressure on that.

Jose Torres  

They, they just don’t seem like they’re going to budge at all at this point. But, you know, we don’t really know what’s happening behind the scenes. Of course, there could always, you know, the Republicans could be under pressure to make a deal and they’re just not reflecting that pressure, but they’re just not even talking about it.

Mary MacNamara  

So, Jose, great. Anything you want to leave us with what’s going on next week? Give us a, like a little heads up, what we want to talk about.

Jose Torres  

Yeah, so one thing that’s new is that ADP is now releasing weekly jobs numbers every Tuesday. So that’s going to be fun. So they’re looking to really fill that gap of the government not being able to publish data so that ADP is coming out with their weekly numbers, of course, we have the weekly economic index from the Dallas Fed.

You know, that still comes out every Thursday. Hopefully the government shutdown ends. We have corporate earnings coming up, big corporate earnings today after the bell we have Amazon reporting as well as Apple. So that would be big. Yeah, we’re going to be watching corporate earnings, real time, economic indicators.

We’ll be watching interest rates to see what December is looking like, let’s see so 71% chance that the Fed is going to reduce rates in December. You know, so we’ll be watching that closely. And yeah, we’re watching geopolitical things and a few other things that I don’t that I’ll remember later.

Mary MacNamara  

Sounds good. So, Jose, our Senior Economist at Interactive Brokers, thank you so much.

Jose Torres  

Thank you, Mary.