MW This expert highlights what could be the macro trade of the coming years. It's not about Trump.

By Barbara Kollmeyer

Robin Brooks says there will be a reward for central banks that allow market signals.

Robin Brooks has had a storied career - former chief currency strategist at Goldman Sachs, former chief economist at the Institute of International Finance, and something of a cult icon in Brazil where he has been positive about the real's prospects.

Brooks, now a senior fellow at the Brookings Institution, took to social media recently with a bold call - what he said was "perhaps the biggest macro trade in coming years."

It's that the euro, up nearly 20% vs. the British pound $(EURGBP.FOREX)$ since 1999, will reverse.

Brooks elaborates on that prediction down in a conversion with MarketWatch.

He said in the past decade, central banks have been providing "a big assist to fiscal policy and deficit funding." Former European Central Bank President Mario Draghi's 2012 "whatever it takes" speech led to an IMF-style bailout for highly indebted member countries.

The ECB then moved onto vehicles like outright monetary transactions and now the transmission power instrument to contain bond-market pressure. Brooks said they were "basically no strings attached, no conditionality if the sovereign is deemed to be fiscally sustainable, then the ECB can intervene to bring yields back down," says Brooks. That pulled the ECB "more in the direction of capping yields" and a fiscal-type role.

Meanwhile in the U.K., and notably during the 2022 short premiership of Liz Truss, the Bank of England generally "leaves the government to its own devices." (The Bank of England did intervene in the bond market during the Truss premiership, but quickly sold the bonds it bought.)

"And so when I talked about this being one of the bigger trends going forward, it's basically that markets will reward, ultimately, the U.K. for that because you can't have fiscal, responsible policy, unless the bond market is allowed to send the signal that fiscal policy is on an unsustainable path," he said.

Brooks says he's "not recommending a trade" but "highlighting what I think markets care about and a theme which is basically fiscal policy, fiscal consolidation and debt."

"It is basically a judgment that markets in an era where debt has risen so much after COVID, where central banks around the world have done so much to keep yields low, that markets will pivot to reward those central banks that allow yields to rise and thus fiscal policy will be more responsible in some places. I think the U.K. is sort of ground zero for that," he said.

Read: U.K. in danger of 'debt death spiral', says Bridgewater founder Dalio

The euro has struggled some against the pound since 2023 after a big run-up in 2022, though the dollar has really stolen the spotlight, amid uncertainty surrounding incoming policies of President Donald Trump's administration.

U.S. tariffs on China, or the EU will "put big appreciation pressure on the dollar, and currencies like the euro and sterling will probably fall for that reason. But that doesn't mean that the euro versus sterling can't have an idiosyncratic move," Brooks says.

Big macro trades have unfolded in more recent years in the currency space, he notes. The yen's $(USDJPY.FOREX)$ tumble in 2024 was "basically about fiscal dominance in Japan and the BOJ [Bank of Japan] having to keep interest rates low because of the high debt burden." Another major macro trade was the euro's fall versus the dollar over the past 10 years from $1.40 to close to parity.

What should investors interested in the euro/sterling macro trade watch? "The single most important thing is obviously how the U.K. government reacts to high interest rates and whether there will be efforts to contain the deficit and bring debt down. That would be the single most important positive signal," he said.

The markets

U.S. stock futures (ES00) (YM00) (NQ00) are climbing and Treasury yields BX:TMUBMUSD10Y are down. The dollar DXY is lower, except against the Mexican peso $(USDMXN.FOREX)$ and Canadian dollar $(USDCAD.FOREX)$, after Trump's tariff vows on those countries.

   Key asset performance                                                Last       5d      1m      YTD    1y 
   S&P 500                                                              5996.66    2.91%   1.11%   1.96%  23.90% 
   Nasdaq Composite                                                     19,630.20  2.45%   0.29%   1.65%  28.21% 
   10-year Treasury                                                     4.63       -15.70  3.70    5.40   52.38 
   Gold                                                                 2748.3     2.50%   4.52%   4.13%  35.85% 
   Oil                                                                  77.25      -1.94%  11.07%  7.49%  3.46% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

For more market updates plus actionable trade ideas for stocks, options and crypto, subscribe to MarketDiem by Investor's Business Daily.

The buzz

Charles Schwab $(SCHW)$ , D.R. Horton $(DHI)$, Fifth Third Bancorp $(FITB)$, KeyCorp $(KEY.AU)$ and 3M $(MMM.AU)$ are reporting this morning. Results from Netflix $(NFLX)$ and United Airlines $(UAL)$ are due after the close. Here's a preview of Netflix and this week's biggies.

Apple $(AAPL)$ shares are slipping. Data showed China sales fell 18.2% in 2024's final quarter. Jefferies also turned bearish on the iPhone maker.

Walgreens $(WBA)$ is tumbling after the Justice Department filed suit, alleging the pharmacy chain aided the opioid crisis.

Trump's memecoin (TRUMPUSD) is trading well off its highs, around $35, while the coin celebrating his wife Melania has also dropped.

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The chart

After big swings in recent months, the S&P 500 Energy Sector ETF XLE looks "overbought," says The Kobeissi Letter team. Currently trading around $93.96, XLE needs to drop to support at around $90, which could mean a retest of the Oct. 29 low of $87.65. "Whether it's a normal pullback or a broader trend reversal, XLE is overdue for a technical pullback," they say.

Top tickers

These were the top-searched tickers on MarketWatch as of 6 a.m.:

   Ticker  Security name 
   TSLA    Tesla 
   NVDA    Nvidia 
   GME     GameStop 
   DJT     Trump Media & Technology 
   AAPL    Apple 
   PLTR    Palantir Technologies 
   MSTR    MicroStrategy 
   AMZN    Amazon.com 
   TSM     Taiwan Semiconductor Manufacturing 
   RGTI    Rigetti Computing 

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-Barbara Kollmeyer

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January 21, 2025 06:29 ET (11:29 GMT)

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