1. Calls for Emmanuel Macron to resign after French government toppled in no-confidence vote.

2. Fed's Daly says no sense of urgency to lower interest rates.

3. Beige Book shows slow employment growth in the U.S.

4. Powell says Fed can afford to be a little more cautious.

5. U.S. services sector expands moderately.

6. Fed's Musalem says time to pause rate cuts may be near.

The French National Assembly passed a no-confidence vote against French Prime Minister Michel Barnier on Wednesday, so Barnier will resign. This marks the first time the French government has been dismissed since 1862. Additionally, the French Patriots Party launched a petition on their website demanding President Macron's resignation.

"Now, we should use this vote to force Emmanuel Macron to step down. For years, he has shown contempt for the French people; for years, his policies have been a complete failure in every sector. Over the last seven years, he has caused unimaginable damage to the country: dividing the nation, creating insecurity, and diminishing France's international status. He has invested in wars, weakening the country's international standing, making France's voice in the EU and NATO smaller, and implementing disastrous policies required by the EU. He has caused the collapse of sectors such as agriculture, industry, healthcare, energy, and immigration. He must resign," the petition reads.

Florian Philippot, leader of the French Patriots Party, called for a protest march this Saturday (December 7) demanding Macron's resignation. 63% of the French public want Macron to resign after the no-confidence vote, according to a survey by the French research and consulting firm Elabe for BFMTV.

To keep the economy in good shape, we must continue to adjust policies, whether in December or later, said San Francisco Fed President Mary Daly on Monday. We will discuss this in the next meeting, but rate cuts are still under consideration by Fed policymakers. Currently, supply and demand are roughly balanced, and inflation continues to decline. The Fed should focus on reducing rates. However, even if we cut rates again, the policy will remain restrictive, which is important.

The neutral interest rate level may already be "close to 3%." However, given the uncertainty surrounding the neutral rate, I believe we can proceed slowly and adjust as the economy provides more information.

Currently, there is no urgent need to cut rates. The Fed needs to "prudently adjust" its policy to ensure that inflation is reduced without unnecessarily slowing the labor market.

The Federal Reserve released its Beige Book on December 4, showing that economic activity has slightly increased in most Districts, with three Districts seeing moderate or modest growth. However, two Districts reported flat or slightly declining economic activity. At the same time, consumer spending remained generally stable, with consumers becoming more sensitive to prices. Mortgage demand was generally low, and commercial real estate loans were similarly sluggish.

In terms of employment, most Districts saw stable or slightly increasing employment levels, with low employee turnover, limited recruitment activity, and minimal increases in workforce numbers. Layoffs were also low. Most Districts expressed cautious optimism about a recovery in recruitment activity. Additionally, wage growth has slowed to a moderate pace in most Districts, with further moderate growth expected in the coming months.

Prices increased moderately across most Districts. Most businesses saw input prices rise faster than sales prices, leading to a decline in profit margins. Businesses expect price growth to remain at current levels. However, several Districts noted that the potential for tariffs on foreign goods under President-elect Trump could pose significant upside inflation risks.

The U.S. economy is doing well, and there is no reason to believe this situation cannot continue, Fed Chairman Jerome Powell said on Wednesday. The risks to the labor market appear small, economic growth is definitely stronger than we thought, and inflation is slightly higher. Despite the lower-than-expected risks, the Fed can still cautiously move toward a neutral rate.

The U.S. budget is on an unsustainable path and needs better coordination between revenues and expenditures. The central bank cannot consider debt and deficits when setting rates; it must focus on inflation. The Fed is not in a fiscal leadership role, but rather uses its tools to achieve its dual mandate of inflation and employment.

The Institute for Supply Management (ISM) reported on Wednesday that the U.S. non-manufacturing PMI slipped to 52.1 last month, the first decline since June. The new orders index hit a three-month low at 53.7. The business activity index fell to its lowest level since August.

The drop was mainly driven by declines in business activity, new orders, employment, and supplier deliveries. However, 14 industries saw growth in business activity, and 13 industries saw increases in new orders. This reinforces the view from recent months that the services sector is showing sustained growth.

St. Louis Fed President Alberto Musalem said on Wednesday that the Fed is close to achieving its goals for employment and price stability, and monetary policy is in a favorable position. Given the "strong" economic conditions and inflation levels under current labor market conditions, a patient monetary policy stance is appropriate. Musalem believes a patient monetary policy stance is appropriate given the current level of inflation in a "strong" economy and job market that is at levels consistent with full employment.

It seems important to keep the option of slowing or pausing rate cuts open, as the timing may be approaching to carefully assess the current economic environment, the information received, and the changing outlook.

UTC+8 14:45 Switzerland Unemployment Rate (Nov)

UTC+8 18:00 Eurozone Retail Sales MoM (Oct)

UTC+8 00:30 Next Day: Richmond Fed President Barkin Speaks

UTC+8 01:00 Next Day: Bank of England MPC Member Greene Speaks

Just when inflation was starting to get (dare I say) boring again, the potential for higher tariffs, a central element of the incoming Trump administration’s agenda, has reignited concerns about inflation. With the much-anticipated Federal Reserve easing cycle just underway, markets must now consider the potential consequences for monetary policy if disinflationary trends were to reverse.

We can look to Trump’s previous term for insight into the Fed’s approach to inflationary pressures from tariffs. In September 2018, the Fed modeled a scenario involving a 15% tariff on all non-oil imports with foreign economies responding in-kind. If the Fed reacted to the resulting inflation spike by raising rates, they projected a mild recession. Conversely, if the Fed looked through the rise in import prices, growth slowed to a mere 0.5% but a recession could be avoided. The Fed concluded that this “see through” response would be most appropriate. However, if inflation expectations rose, which would be more likely in a very tight labor market, then the preferred response could be to hike interest rates.1

More recently, Minneapolis Federal Reserve Bank President Neel Kashkari shared a similar perspective, describing tariffs as a one-time increase in prices that is not inherently inflationary in the long term. However, he warned that a “tit-for-tat” trade war could exacerbate inflationary pressures, sending prices higher.

Today’s economic environment also differs meaningfully from 2018—while the inflation heatwave is mostly past us, its embers are still alive.

Recent events have reminded companies of their pricing power, and workers are now more attuned to cost-of-living increases in wage negotiations.

Although market-based long-term inflation expectations are anchored around 2.0%, consumer expectations have hovered around 3% since May 2021, half a %-point higher than their range in 2018-19.

The recent experience of being slow to respond to “transitory” pandemic-related inflation may prompt FOMC members to adopt a more cautious approach to rate cuts next year, especially in the context of resilient economic growth.

Additionally, several other trade war effects could influence the economy, such as slowing global growth, declining productivity and policy uncertainty weighing on business investment, all of which add complexity to any tariff projections. Investors should also be wary of placing too much emphasis on any specific cabinet appointments. Regardless of whether the incoming administration is staffed with tariff “hawks”, the former President has a track record of initiating trade negotiations with large, ambitious demands that are ultimately whittled down, and look significantly different, to the final agreements.

While it may be premature for the Fed to incorporate tariff implications into monetary policy decisions, current data on resilient growth, healthy labor markets and other factors suggest that the Fed's path will be gradual, possibly settling at a higher level than their latest projections indicate. For bond markets, this, along with the impact of higher deficits, could keep long-term yields elevated in the year ahead.

Donald Trump’s re-election as president of the United States on 5 November has stirred both optimism and apprehension in global financial markets. As his administration embarks on a policy agenda heavily focused on tax cuts, trade protectionism, deregulation, and stricter immigration policies – collectively known as Agenda 47 – investors and analysts are evaluating the implications for the economy and equity markets. This column explores the impact of Trump’s victory on financial assets and highlights how political ‘proximity’ to his agenda shaped firm-level returns.

On 5 November, Donald Trump secured a second term as president of the United States. His victory was driven by a policy agenda focused on accelerating economic growth via tax cuts, increasing tariffs and trade protectionism, enforcing stricter immigration controls, reducing government intervention, and decreasing regulation.

As Trump’s victory became evident – reflected in betting markets that rapidly incorporate election-relevant news in an information-efficient manner (Karau and Fischer 2024) – financial assets likely to be influenced by Trump’s agenda began reacting significantly (Figure 1). US 10-year Treasury yields rose sharply, increasing from 4.28% at 7:00 PM Eastern Time to 4.46% by 10:30 PM, driven by expectations of fiscal stimulus and inflationary pressures. Bitcoin prices surged as the cryptocurrency industry anticipated benefits from deregulation. The dollar index surged in response to higher expected yields and anticipated trade barriers, with larger depreciations against the dollar observed for currencies of countries likely to be significantly affected by heightened trade protectionism and stricter migration policies, such as the Mexican peso.

The equity market’s response was equally dramatic. On 6 November, the S&P 500 posted a gain of around 2.5%, marking its strongest one-day performance following election results in over a century. Market volatility, as measured by the VIX index, plummeted by more than four points, reflecting the resolution of pre-election uncertainty and optimism about corporate earnings growth under Trump’s pro-market administration (Albori et al. 2024). Sectoral performance, however, was heterogeneous: banks, energy, and industrials – sectors expected to benefit from corporate tax cuts and deregulation – experienced the largest gains (Figure 2).

To assess the relationship between firm-level returns and political proximity to Trump’s 2.0 agenda (commonly referred to as Agenda 47), we construct a textual based firm-level sentiment indicator following the methodology of Hassan et al. (2019). This indicator measures the share of the conversation between analysts and firm management that centres on terms linked to Agenda 47 and, by conditioning on positive and negative tone words, provides a proxy of firms’ attitudes toward Trump’s programme. Higher sentiment scores indicate stronger alignment with Trump’s policy priorities.

On average, firms in the energy, financial technology, and industrial sectors exhibit higher sentiment values, while those in the renewable energy and pharmaceutical sectors show lower values, reflecting their lower likelihood of benefiting from the Trump administration’s policies (left column of Figure 3). A firm-level event study shows that firms with higher sentiment scores experienced significantly higher abnormal returns in the days following the election. We first estimate a capital asset pricing model (CAPM) for each firm over the period from 15 November 2022, when Trump announced his candidacy for a second term, to 4 October 2024, one month before the election. We then compute abnormal returns around the election date, as differences between actual returns and those predicted by the CAPM model. A one-standard-deviation increase in political proximity was associated with a 7% higher abnormal return on 6 November, with the effect persisting over the subsequent two days and peaking at around 10% (see Figure 3, right column).

While equity markets celebrated Trump’s re-election, other indicators suggest a more nuanced picture. The Economic Policy Uncertainty (EPU) index (Baker et al. 2016), derived from media coverage of policy-related terms, rose significantly in the immediate aftermath of the election, contrasting with the decline in the VIX equity volatility index (Figure 4). This divergence likely reflects differing time horizons. The decline in the VIX likely captures the resolution of pre-electoral uncertainty and anticipation of near-term policies, such as the renewal of the Tax Cuts and Jobs Act (TCJA), which is expected to face fewer obstacles in a Republican-majority Congress and boost corporate profits. On the other hand, the increase in the EPU index may reflect analysts’ uncertainty about Trump’s policies that may matter more in the medium to long term. In particular, uncertainty surrounding more controversial measures in Agenda 47, such as new tariffs and stricter immigration policies, looms large. Analysts fear that these measures could dampen long-term economic growth and exacerbate inflationary pressures (e.g. McKibbin et al. 2024, IMF 2024), even as fiscal stimulus and tax cuts provide short-term support.

We also uncover a potential disconnect between the equity market responses and those implied at the macroeconomic level due to sectoral composition. In this context, assessing the effects of Trump’s election based solely on equity returns could be partially biased, as certain sectors (e.g. information technology and financials) that reacted positively to the news are overrepresented in the stock market relative to their weights in the real economy. When returns are reweighted by GDP shares,the contribution of these sectors diminishes, underscoring potential disparities between financial market reactions and real economic prospects (Figure 5).

We argue that the favourable response of US equity markets to Trump’s victory should be interpreted with caution, particularly when attempting to extract meaningful signals about the real economy outlook. First, firm-level equity returns were partially influenced by firms' political proximity to Trump’s agenda. Second, index-level returns may not accurately reflect real-economy prospects, as economic sectors’ weights in equity indices differ significantly from their contributions to GDP. Third, while equity volatility declined, measures of economic policy uncertainty increased following the election, highlighting that, especially in the longer term, there remain numerous unknowns about the implementation of Trump’s agenda.

Regional inequality remains deeply entrenched across emerging Europe (Storper et al. 2022), despite some modest convergence. While many countries show a gradual decline in overall income inequality, stark disparities persist both between and within nations. Between countries, a pronounced East–West gradient exists, with Central European and Baltic states enjoying higher GDP per capita than Central Asia and parts of Eastern Europe. Within countries, divisions are also clear: Poland's West–East split, Türkiye's coastal–interior gap, and the general concentration of wealth in capital cities and regions bordering developed economies.

Figure 1 illustrates within-country convergence patterns for various EBRD economies and comparator countries during 2010–2019. The left axis displays beta-convergence coefficients from country-specific regressions, where negative values indicate faster growth in poorer regions. For example, a coefficient of -0.02 indicates that the income gap between regions narrows by about 2% annually. Conversely, positive coefficients indicate that wealthier regions are growing faster, widening the income gap. Diamond markers represent sigma-convergence, measured by changes in the standard deviation of log GDP per capita over time, where negative values indicate declining cross-regional inequality.

On average, poorer regions in EBRD countries are converging with wealthier ones at a rate of approximately 1% per year. Although this indicates progress, the pace is slow: at the current rate, it would take about 70 years to halve the existing income gap between regions. This convergence rate is slower than the typical cross-country rate of 2%, often referred to as the ‘iron law of convergence’, where poorer economies tend to grow faster than wealthier ones (Barro 2015).

Special Economic Zones (SEZs) have proliferated across EBRD countries, surging from fewer than 100 in 1990 to over 1,150 by 2020. Using a newly compiled dataset of SEZs that includes their locations, timing, sizes, and purposes, the EBRD Transition Report 2024-25 analyses their performance through two complementary methods: a difference-in-differences approach and a synthetic control method.

Both approaches show that SEZs, on average, tend to boost local economic activity, with their impact growing over time. Measuring nightlight intensity within a 2km radius around each zone's centre reveals effects that extend beyond the SEZs themselves (SEZ size is modest, with a median radius of 0.16 square km and a radius at the 75th percentile at just 0.97 square km). This analysis captures how SEZs can stimulate surrounding neighbourhoods through multiple channels: increased demand for services, enhanced infrastructure development, and business spillovers from operations within the zones.

Why do some SEZs succeed while others fail? To analyse this, we define success as above-average growth in nightlight density (compared to the country as a whole) within a 5km radius around the SEZ over the decade following establishment. By this measure, only 40% of SEZs prove successful, with effectiveness varying markedly even within countries. Further analysis reveals that among infrastructure factors, only port proximity significantly predicts success. Other variables – including railway and road access, telecommunications quality, and local amenities – show no consistent relationship with SEZ performance. In fact, infrastructure factors explain just 3.5% of the variation in SEZ success, suggesting limited predictive power.

The presence of tertiary-educated workers in a region also strongly correlates with SEZ success, while a stable security environment (measured by a local law-and-order index) shows a modest significant positive relationship. Adding these governance factors raises the model's explanatory power to 7%, increasing to 11% with country fixed effects. That is, most variation in SEZ success remains unexplained.

Prior research has shown that SEZ performance is also influenced by many factors that are difficult to quantify. These include the quality of relevant policy frameworks and institutional structures at the national and local levels (Farole and Akinci 2011, Aggarwal 2012, Frick et al. 2019). Including region fixed effects – unobserved characteristics of various regions that do not change over time – further improves the R-square of models explaining the success of SEZs, with the percentage of variation explained rising to (just) 24%.

Lastly, SEZ performance is shaped by dynamic global factors, including shifting production networks and evolving comparative advantages across countries. Local factors – particularly effective zone management and implementation – also play a crucial role, though these are even harder to capture in statistical analysis. Indeed, SEZs typically seek to overcome deficiencies in governance at regional and national levels by creating a more favourable environment for business within the zone itself.

As Frick and Rodríguez-Pose (2023) emphasise, Special Economic Zones need careful tailoring to regional contexts and potential in order to maximise the likelihood that they turn out be successful. This requires investing in fundamentals: human capital development is crucial for enhancing SEZ performance and enabling transitions to higher-value activities (Rodrik and Stantcheva 2021), particularly through expanded education and skills programs. Success also depends on robust institutions – our analysis highlights how sound governance and security at the local level increases the chances that a SEZ turns into a success rather than a costly failure.

The Volatility Index (VIX), commonly referred to as the "Fear Index," is a widely followed measure of market risk and investor sentiment. Developed by the Chicago Board Options Exchange (CBOE), it reflects the expected volatility of the S&P 500 Index over the next 30 days. Understanding the VIX and knowing how to trade it can provide valuable insights into market conditions and opportunities to profit during turbulent times.

The VIX is calculated using the prices of S&P 500 options and represents the market's expectations for future price fluctuations. It is often referred to as a barometer of market fear because it tends to spike during periods of uncertainty or significant market declines.

Key Features of the VIX:

Inverse Relationship with Stock Market Performance: Typically, the VIX rises when the S&P 500 declines, reflecting heightened fear and uncertainty. Conversely, it tends to drop when markets are stable or trending upward.

Forward-Looking Metric: Unlike historical volatility measures, the VIX provides a forecast of market turbulence, making it a valuable tool for traders and investors.

Range of Values: The VIX usually hovers between 10 and 20 during calm markets but can soar above 30 or 40 during extreme volatility.

Market Sentiment Indicator: The VIX serves as a proxy for market sentiment, offering insights into how traders perceive future risks. A high VIX suggests fear and uncertainty, while a low VIX indicates complacency.

Risk Management Tool: For institutional and retail investors alike, the VIX is a crucial component of risk management. It helps in understanding potential market fluctuations and preparing strategies accordingly.

Hedging Opportunities: The VIX provides a way to hedge against market downturns, as it often rises when stock prices fall.

While you cannot trade the VIX directly, there are several instruments designed to allow traders to speculate on or hedge against volatility. These include futures, options, and exchange-traded products (ETPs).

VIX futures allow traders to bet on the future level of volatility. These contracts are popular among institutional traders and require an understanding of the term structure of volatility (contango and backwardation).

Advantages: Can be used for hedging or speculation.

Challenges: Requires knowledge of futures trading and is influenced by factors beyond current volatility levels.

Options on the VIX give traders the right (but not the obligation) to buy or sell volatility at a specific price. These instruments are ideal for those with experience in options trading and can be used for hedging or speculative purposes.

ETPs, including ETFs and ETNs, track VIX futures and offer an accessible way for retail investors to gain exposure to market volatility.

Examples: Products like VXX (iPath S&P 500 VIX Short-Term Futures ETN) and UVXY (ProShares Ultra VIX Short-Term Futures ETF).

Considerations: These products are affected by contango, making them suitable primarily for short-term trades.Strategies for Trading the VIX

When the market shows signs of instability, traders can use VIX futures or options to hedge against potential losses in their portfolios. For example, buying VIX call options can provide a buffer during sharp market declines.

Traders can speculate on future volatility by taking positions in VIX-related products.

For instance:

Buy VIX futures or call options during periods of low volatility, anticipating a spike.

Short VIX futures or buy put options when the VIX is high, expecting it to revert to the mean.

Advanced traders use spread strategies, such as calendar spreads or ratio spreads, to profit from differences in VIX futures prices across time frames.

While trading the VIX offers unique opportunities, it also comes with inherent risks:

Complexity: Understanding the intricacies of VIX-related products and their price behavior requires expertise.

Contango and Backwardation: These conditions in the VIX futures market can erode returns, particularly for long-term positions.High Volatility: The VIX itself can exhibit significant price swings, making it challenging to predict movements accurately.

The VIX is most valuable during times of market uncertainty. Traders often monitor it closely before and during significant geopolitical events, economic data releases, or central bank decisions. A rising VIX can signal increased fear, while a declining VIX may indicate market stabilization.

The Volatility Index (VIX) is a powerful tool for gauging market sentiment and preparing for price fluctuations. Whether you're a long-term investor looking to hedge against downturns or a trader seeking speculative opportunities, understanding how the VIX works and how to trade it is essential.

By staying informed about market conditions and utilizing appropriate strategies, you can harness the VIX to navigate turbulent times and achieve your financial goals. However, due to its complexities and risks, trading the VIX requires a solid understanding of its dynamics and a disciplined approach.