By Michael Brown Senior Research Strategist at Pepperstone
DIGEST – Geopolitical events remain front and centre for market participants as President Trump throws around tariff threats over the issue of Greenland, while this week’s economic calendar is jam-packed.
WHERE WE STAND – Ugh, here we go again then.
It’s been a while since President Trump threw some tariff threats around, but the ‘tariff man’ seems to be back once again having, over the weekend, threatened several European nations with a 10% tariff effective 1st February, rising to 25% on 1st June, and intended to remain in place until the US has agreed a purchase of Greenland.
Naturally, this leaves quite a lot to unpack. Markets, though, have reacted in relatively predictable fashion, with equity futures lower across the board; the greenback broadly softer amid a modest ‘sell America’ vibe; and, precious metals such as gold and silver rallying to fresh record highs. Note, cash Treasury trade is closed today due to MLK Jr. Day.
As for where things now stand, this is quite clearly, at face value, a dramatic escalation in Trump’s attempts to obtain Greenland, while also marking a further significant deterioration in transatlantic relations. The only real winners, while this saga pans out, are in Beijing and Moscow, without wishing to become too hyperbolic about things.
While there are clearly a lot of moving parts here, and we must monitor the potential for any retaliatory action from the European side, it does seem like this is yet another negotiating gambit from Trump, of the ilk that we’ve seen so many times over the last year. ‘Escalate to de-escalate’ springs to mind, especially with the inbuilt ratcheting higher of these levies in a few months’ time; I think it no coincidence that this announcement came on the eve of the ‘great and the good’ meeting in Davos this week.
That said, more fundamentally, there are huge questions over the legal mechanism Trump is proposing to use here, especially with the Supreme Court set to rule imminently on the President’s authority to set tariffs using the IEEPA, and with that case now almost certain to find against the Admin given these latest developments. Meanwhile, it remains the case that EU nations can’t be tariffed separately owing to the ‘common external tariff’ so, again, there are big question marks on that front too.
On the whole, though, I’d wager that this is all the ‘art of the deal’ playing out once more – toss out an outlandish threat, escalate the situation significantly, focus minds and extract concessions from the other party involved, before reaching some form of agreement in shorter order than would otherwise have been the case. I’ll leave others to question the merits of that approach, and potential longer-run geopolitical fallout from it, but for markets such a scenario likely means some near-term choppiness as headline noise becomes deafening, before a relief rally in due course when another ‘TACO’ moment arrives. Unsurprisingly, while that headline noise does pan out, some participants may seek to take profits on their long risk positions, or seek downside protection through options, though all this should further bolster what was already an incredibly solid bull case for precious metals, like gold and silver, where the ‘path of least resistance’ continues to lead clearly higher.
Speaking of that, the fundamental bull case for equities remains a solid one to me, with underlying economic growth solid, earnings robust, plus with both the monetary and fiscal backdrops to grow looser as the year progresses. The key question, now, will be gauging when headline risk has died down enough to permit participants to re-focus back on what is still a very positive fundamental backdrop. I’d not expect that to take especially long, hence would continue to view dips as buying opportunities for the time being.
LOOK AHEAD – A holiday-shortened week awaits, with the US closed today for Martin Luther King Jr. Day, but the docket for the week ahead is still a pretty busy one.
Releases from here in the UK take centre stage, with a full macro ‘health check’ coming up, including our latest reads on the labour market, inflation, retail sales, and public sector borrowing. The former two shall be the most important prints to watch, though barring a material surprise in either report, the prospects of a BoE cut at the February meeting should remain relatively slim.
Elsewhere, ‘flash’ PMIs round out the week from a data perspective on Friday, though any revisions to Q3 US GDP, released a day prior, might also catch participants’ focus. We also have policy decisions this week from the Norges Bank, and the Bank of Japan, though neither is set to alter their policy stance this time out.
Besides that, earnings season steps up a gear with the likes of 3M, Netflix and Intel (among others) set to report, before focus then turns to the ‘megacap’ tech names next week. Meanwhile, this week also sees the annual World Economic Forum in Davos, which President Trump will be attending and speaking at, and which is also likely to produce remarks from a whole host of monetary policymakers too. On that note, Fed independence is likely to again be in focus this week, with the Supreme Court due to hear arguments in Governor Cook’s case against her dismissal on allegations of mortgage fraud on Wednesday.