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

KBC Sunset

Monday, February 3, 2025

Daily Market Overview

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Markets

• President Trump’s tariffs on Canadian, Mexican and Chinese goods took markets off guard. Even though he said multiple times he would install them February 1st investors clearly assumed he would use them as leverage first in trade talks before actually imposing them should negotiations have failed. The EU in particular has been warned. Trump accompanied the 25% (10% for China) levies over the weekend with comments that the European continent “pretty soon” faces a similar fate. With countries much better prepared than in 2016 and countermeasures having already been announced, things could escalate quickly. Trump is meeting outgoing Canadian PM Trudeau later today ahead of the tariffs going into effect tomorrow (6 PM our time). There’s only an outside chance of things being averted after all, so risk aversion rolls over every corner of the market. Stocks slip 1.6% in Europe and are down 2% on Wall Street (Nasdaq). Bunds outperform Treasuries in the bond market. German yields drop between 8-9 bps across the curve. Markets assume the ECB will come to the rescue with growth supporting monetary policy. Kneejerk rate cut bets soar with the terminal rate seen around 1.75% from 2.75% currently. But as it happens, European inflation numbers printed today showcase the limited wiggle room Frankfurt has. Both headline and core CPI surprised to the upside, coming in at 2.5% and 2.7% respectively. Services inflation remains at an elevated 3.9%. US Treasury yields rise about 5 bps at the front as markets try to gauge what import levies mean for inflation and Fed policy. The long end of the curve eases 4 bps on safe haven flows. Trading in all segments of the curve is very volatile though. Canadian yields fall off a cliff with losses ranging between 9.5 and 16.5 bps. These add to the double digit losses seen in the days ahead of the weekend. Canadian money markets up their expectations for lower policy rates through 2025: from less than two additional cuts after last week’s one (to 3%) to a comfortable three.

• The US dollar stands out on currency markets. While off the highs seen in (less liquid) Asian trading, the greenback scores gains against all G10 peers except the Japanese yen. The euro trembles, pushing EUR/USD to 1.026 compared to Friday’s 1.036 close. The Canadian dollar obviously trails with USD/CAD testing the 2015 and 2020 highs around 1.47. These serve as resistance levels ahead of 22-yr highs. The Mexican peso drops to USD/MXN 21, the weakest MXN level in two years time. A trade-weighted USD index jumped towards its previous January/2-yr high at 110 early in the session before paring gains to 109.23 currently. On the benefiting side (ex. USD) we find JPY, the Swiss franc and currently even GBP, be it against the euro. Trump’s beef with the UK appears a small one compared to others and that’s keeping sterling headwinds down to a minimum for the time being.

News & Views

• The decline in Czech manufacturing conditions eased at the start of 2025 according to the January manufacturing PMI (46.6 from 44.8 vs 45.7 expected) which nevertheless remains in recessionary territory (<50) since June 2022. Challenges continued to come from key industry and export markets, with interest from domestic construction and machinery sectors, alongside demand from Germany, reportedly waning again. Output and new orders continued to fall amid subdued demand conditions, though at a slower pace, with a sharp decrease in backlog of work as well. The pace of job shedding slowed to the weakest in 10 months as business confidence in the year ahead improved. That doesn’t show up yet with input buying and inventories being reduced in January. On the price front, manufacturers recorded a faster but historically subdued rise in input costs. Companies continued to cut their selling prices (4th consecutive month) amid efforts to remain competitive and drive new orders. CE currencies underperform in today’s risk-off market setting. EUR/CZK rises from 25.10 from 25.25 but remains within existing (sideways) technical boundaries.

• OPEC+ sources told Reuters that the Joint Ministerial Monitoring Committee, which meets today, is unlikely to recommend a production increase beyond what has already planned (starting in April). They won’t give into US President Trump’s demand at OPEC’s address to “cut the price of oil”. Brent crude prices surge from a close at $75.67/b at the end of last week to $76.85/b currently after Trump imposed a 10% tariff on energy and energy resources coming from Canada.