- U.S. index contracts are losing heavily, amid fears of a trade war after Trump pledged to impose 25% tariffs on Canada and Mexico and 10% on Chinese goods; the US100 loses -2.5%, the US500 retreats nearly 2%, and the US30 loses 1.5%; the sell-off is again centred around technology company stocks.
- Mexico has not decided to respond, but Canada has already responded with 25% retaliatory tariffs on worth C$155 billion US goods (f.e. wine, beer, food, appliances etc.); China has also announced that will respond with retaliatory actions. The market fears that the situation will lead to structurally higher inflation, making it more difficult for the Federal Reserve to cut rates further.
- The U.S. Dollar Index (USDIDX) is gaining nearly 1% on a wave of risk aversion, although yields on 10-year U.S. Treasury bonds are lower at 4.51%, yields on 2-year Treasury bonds have risen 5 bps to above 4.24% - indicating that investors are concerned about indirectly resulting inflation from tariffs in the shorter rather than longer term
- The Asian session was dictated by sellers, with indexes from the APAC region losing the most in nearly six months. The main macro reading today was China's January manufacturing PMI; the reading surprised negatively, showing 50.1 versus 50.6 forecast and 50.5 previously. CHN.cash contracts retreated 0.7%, while Japan's JAP225 lost 2.15%.
- Australian retail sales came in above forecasts, falling just -0.1% m/n vs. -0.7% forecasts and 0.8% previously. Building permits rose at a 0.7% pace, vs. 1% expectations and -3.6% drop previously
- In the minutes, Bank of Japan members stressed that the 4th consecutive year of domestic inflation above 2% leads to higher inflation expectations, and pledged to raise rates if incoming, new data justify it. They pointed to the risk of higher wage negotiations in the spring and the long-term weakening of the yen as pro-inflationary factors.
- The voices of some members were clearly hawkish, suggesting that current real interest rates are deeply negative, but the BoJ's overall tone did not change the USDJPY's reaction; the pair is gaining more than 0.2% on the back of a strong dollar. Japan's final manufacturing PMI for January indicated 48.7 versus 48.8 in the first reading.
- Gold loses 0.5%, silver 0.8% and declines are seen in the agricultural commodities market. NATGAS, on the other hand, is up almost 7%; also oil is up more than 1%.
- Trump will hold talks with representatives of Mexico and Canada today; there is still a hope, that the tariffs will not go into effect and a last-minute agreement can be reached. Otherwise, they will take effect as of tomorrow, i.e. February 4.
- Cryptocurrencies are also losing out due to risk aversion; Bitcoin retreats to $94,000. Ethereum retreats more than 12% to $2,500 and the vast majority of smaller cryptocurrencies are losing by double digits, including Cardano, Bitcoincash, Polkadot and Ripple.
- Donald Trump commented that 'the pain from tariffs will be worth the price' and warned that 'tariffs could get a lot worse.' He also stated that the U.S. is preparing tariffs against the European Union. Currently, tariffs will impact $1.3 trillion worth of trade (equivalent to 5% of GDP) from the U.S.'s three largest trading partners, which account for 43% of all imports. The Federal Reserve estimates that these tariffs will reduce GDP by 1.2% while adding 0.7% to the Personal Consumption Expenditures (PCE) index
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