KBC Sunrise Market Commentary 03/02/2025 via Trader Talent

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Market Commentary

Markets

•          The US Tariff Man walked the talk. From tomorrow February 4, 12:01 am EST, additional tariffs for Canadian imparts will be 25% with an exemption of 10% applying for energy or energy resources. Mexico faces a similar 25% tariff rate, again in addition to any other existing duties. The tariff rate on China will be 10%. Even though there’s a tight deadline, there’s still some room for de-escalation with White House documentation providing no explicit criteria for lifting the tariffs apart from “an improvement in the immigration and fentanyl situations”. US President Trump invoked the International Emergency Economics Power Act, to sign the executive orders, leaving US courts and a legal challenge as a wildcard. Affected countries won’t let them be bullied around. Canada already announced 25% tariffs against some C$30bn of US goods with significantly more to come (C$125bn) in three weeks’ time. They also started a national “buy Canadian” campaign in an effort to boycott US goods. Mexican President Sheinbaum also pledged retaliation with China vowing corresponding countermeasures. The US White House highlighted its “retaliation clause” suggesting the President may increase or expand in scope the duties imposed to ensure the efficacy his actions”.

•          The tariff escalation triggers risk aversion this morning. Main Asian stock markets lose around 3% with European and US equity futures pointing at losses of around 2.5%. Chinese markets are still closed for Lunar New Year celebration but the off-shore yuan trades back near multi-year lows (USD/CNY 7.35 area). USD strength is a global theme, but first resistance holds apart from affected countries. The trade-weighted greenback spikes from a 108.37 close on Friday to currently 109.50. The YTD top and resistance at 110.17 remains out of reach. EUR/USD set a minor new low at 1.0141 in the illiquid start of the trading week, but changes hands above the 1.0178/1.0201 support area for the moment. The picture obviously remains extremely fragile. The Canadian loonie (USD/CAD > 1.47 for first time since 2003) and Mexican peso (USD/MXN > 21 for first time since 2022) stand with the back against the wall. JPY is the only one to keep pace with the dollar, trading broadly unchanged around USD/JPY 155. The US yield curve flattens with the front end of the curve adding up to 5 bps (higher inflation threat) and the long end losing around 2 bps (hit to growth & risk aversion). We err on the side of caution this week until first dust settles.
 

News & Views

•          Belgian political parties have agreed on a government, seven months after the June 2024 elections. Bart De Wever from the Flemish nationalist party N-VA is prime minister of a five-party coalition that includes CD&V, Les Engagés, MR and Vooruit. The overarching goal is to save some €23bn to reduce the budget deficit to (below) 3% by 2030. To do so (amongst many other things) a capital gain tax of 10% on financial assets (with the first 10k exempted) is introduced, a bonus-malus system is attached to the pension system and unemployment benefits are limited in time (two years). A €6.5bn big fiscal reform includes €4.4 bn lower taxes on labour in a complementary move to incentivize people to work if they are able to. The government estimates this should in time generate around €8bn in additional revenue. Almost €5bn is earmarked for new policies, including police, justice, migration as well as defense. The Arizona coalition in its calculations assumes a 7-yr adjustment period to address the budgetary situation instead of four but this is pending on the EC’s approval. Belgium has until April to deliver a detailed budget proposal. Rating agency Fitch will have the opportunity to assess the budget this Friday. After having lowered the outlook to negative back in March 2023, it’s make or break for Belgium’s current double AA-rating.

•          Czech prime minister Fiala in a televised appearance yesterday said he would like for the central bank to ease monetary policy faster. His comments, accompanied by stressing he respects the central bank’s independence, come ahead of Thursday’s policy meeting. The Czech National Bank is expected to lower policy rates from 4% to 3.75%, bringing it in close proximity of what is considered a neutral rate (3.5%). Fiala also criticized CNB governor Michl for not having discussed a proposal to potentially invest some of the country’s monetary reserves in crypto currencies, including Bitcoin. The Czech crown slips to EUR/CZK 25.2 this morning in a move shared by regional peers amid general risk off.
 

Graphs

German 10-y Yield

The ECB lowered rates again in January but is nearing a fine-tuning phase where back-to-back reductions are over. A rate cut in March (to 2.5%) may be complemented by removing the label “restrictive” on its policy stance as the debate on the neutral interest rate kicks off. The escalating US trade war adds a layer of uncertainty and volatility in the mix with risk aversion currently the dominant factor.
 

US 10y yield

After three consecutive cuts, the Fed installed a pause in January which we expect to last through June. The Fed wants to see “serial readings” suggesting inflation is progressing towards target. A pause simultaneously offers time to a clearer view on president Trump’s policies. The long rates status quo provides a solid bottom beneath front-end US yields. How will Trump’s protectionist plays affect future policy/the economy? First higher inflation, next weaker growth?
 

Calendar & table

Contacts