In Davos, the global elite
Were treated to more than a Tweet
The president spoke
And in one broad stroke
Explained that he won’t be discreet
 
For oil, he wants prices falling
For Europe, he said it’s appalling
That nations don’t pay
Enough to defray
The costs of the war they’re forestalling

 

If, prior to yesterday, European leaders weren’t sure how things were going to play out now that Mr Trump is back in office, they have a whole lot better understanding now.  I imagine that all their fears were realized when Trump spoke via video at the WEF meeting in Davos, Switzerland.  It’s funny, Argentine president Javier Milei has been calling out the globalist agenda since his election last year and Europe didn’t care and didn’t change their behavior.  I guess that makes sense because the European press would never allow the narrative to change for a minor player like that.  Alas, for the European narrative now, the US, one of their largest trading partners and the nation that insures their safety via NATO membership, is calling them out for their behaviors, whether it is the rarely discussed tariffs they impose on US imports, or the lack of funding for a war they claim is critical to continue in Ukraine, and they are suddenly aware they better reconsider their positions. 

It will be very interesting to watch if things change in Europe (I think they will) and how quickly these changes will come (that could take more time).  Arguably, the biggest problem the current  European leaders have is that there are already large segments of their populations that are unhappy and have been voting accordingly, whether for AfD in Germany, or the RN in France to name two.  Trump’s comments are going to only foment more support for those positions.  I suspect the elections upcoming in Europe are going to see a further rightward swing, or perhaps simply a further swing against the incumbents given what appears to be a significant amount of dissatisfaction amongst the electorate.  No matter your view of Trump’s policies, we all must recognize he is a remarkable political force!

Fifty basis points
Is now Japan’s new baseline
Can it go higher?

As widely expected, the BOJ hiked its base rate by 25bps last night to 0.50%, the highest levels since October 2008.  The immediate market response, as you can see in the chart below, was for the yen to rally (dollar decline) almost one full percent despite interest rate markets having fully priced in the hike.  However, as you can also see, the yen has given back virtually all those gains in the wake of Ueda-san’s press conference where he explained the BOJ was not “seriously behind the curve” which was taken as meaning that it will be a while before they move again.  

Source: tradingeconomics.com

While JGB yields did perk up 2bps on the session, it hardly seems like the start of a rout.  And, as I highlighted yesterday, the interest rate differential does not seem likely to have changed enough to alter investor plans. Going forward, I expect the yen to be entirely beholden to the dollar’s broad movement.  If, as I suspect, the market starts to price in a more hawkish Fed, USDJPY is likely to go back and test its highs from last summer.

Ok, let’s move on to the overnight market action.  Once again, US equities rallied yesterday, although at this hour (7:10), futures are essentially unchanged.  In Asia, Japanese shares shed early gains after the BOJ rate hike and Ueda presser and closed unchanged on the day.  However, both Hong Kong (+1.9%) and China (+0.8%) rallied on the news that Trump and Xi had a “friendly” conversation as traders and investors took that to mean that tariffs on Chinese goods were not coming right away.  As to the rest of Asia, once again there were both gainers (Korea, Taiwan, Australia) and laggards (India, Indonesia, Philippines) with the rest showing little net movement.  

In Europe, the picture is also mixed as the CAC (+0.9%) is leading the way higher as investors want to believe that Trump’s call for lower interest rates as well as lower oil prices will help the European economy, especially the luxury sector in France.  But elsewhere in Europe we see Germany (+0.3%) a bit higher while Spain (-0.4%) and the UK (-0.4%) are lagging with the former suffering from rising energy prices while the ongoing political mess in the UK has investors steering clear of the Kingdom for now.

In the bond market, Treasury yields are unchanged this morning, holding the recent 10bp bounce from the lows seen last week.  European sovereign yields are higher by 1bp to 2bps across the board, with activity quiet and we’ve already discussed JGBs.  

Ironically, after Trump’s call for lower oil prices, they are firmer this morning, up 0.6%, although in the broad scheme of things, relative to the recent price action, that is tantamount to unchanged.  Here is something to consider though, which is a little bit outside the box.  The Biden EO that cited the OCSLA of 1953 prohibited drilling across a series of areas including the Atlantic and Pacific Oceans as well as the Gulf of Mexico.  Now, what is one of the first things that Trump said?  He is renaming the Gulf of Mexico to the Gulf of America.  Does that nullify the EO?  (h/t Alyosha).  I’m sure that is a legal battle to be had, but it would be right in line with Trump’s MO.  It would also allow drilling to continue unabated there, which to my understanding, has the most fruitful potential new sites.

Meanwhile, in the metals markets, they are all rallying nicely this morning with gold (+0.85%) now just about 1% below the all-time high seen in October of $2826/oz.  There are many market technicians (and gold bugs) calling for a breakout to new highs, but there is a case to be made this remains a technical short squeeze into NY delivery next week.  However, gold has dragged both silver (+0.9%) and copper (+0.9%) along for the ride.

Finally, the dollar is under pressure this morning with the DXY (-0.5%) falling to its lowest level since mid-December.  Ironically, while the G10 weakness is widespread (EUR +0.7%, GBP +0.5%, AUD +0.5%) the yen, after the rate hike, is the massive underperformer.  In the EMG bloc, one of the biggest movers is CNY (+0.5%) which is clearly benefitting from that phone call, while SGD (+0.5%) is benefitting despite the MAS having eased monetary policy.  This is an indication of just how much of a dollar selling move this is this morning.  In fact, other than the yen’s modest decline, every other major counterpart currency is higher vs. the dollar today. 

On the data front, Flash PMI (exp 49.6 Manufacturing, 56.5 Services) leads off at 9:45 then at 10:00 we see Existing Home Sales (4.19M) and Michigan Sentiment (73.2).  With the Fed meeting next Tuesday and Wednesday, there are still no speakers.  Perhaps of more interest is the fact that we have not seen a single article from the Fed whisperer lately.  As the data is third tier this morning, I wouldn’t expect anything today either.  Too, next week there is limited data of note before the meeting so unless we see a narrative shift of substance, I imagine the Fed will do nothing next week and Powell will dodge any questions regarding the future.

For now, it is all Trump and his actions, comments and EOs.  And you can’t plan how to trade those.  Once again, this is why hedging is so important.

Good luck and good weekend

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