• The Trump 2.0 tariff chaos/unpredictability continues. High profile 25% levies announced this weekend on imports of Mexico and Canada obtained a last minute ‘delay ‘overnight. However, uncertainty persists. At the same time, 10% levies imposed on Chinese imports entering the US were applied ‘as planned’, triggering multiple, admittedly still modest, Chinese retaliation measures (10-15% tariffs on energy and some other goods, anti-trust probe versus Google and export controls on rare metals, amongst others). At first sight, the market reaction stays contained and orderly. However, this guarded market reaction at least partially might be a sign of paralysis due to a lack of visibility rather than indicating some comfort. Any directional reaction to whatever action from the US administration potentially might have to be reversed on new, contractionary measures/announcements anytime soon. This lack of visibility not only applies for the investment community, it also determines central banks reaction function. Recent Fed comments at least suggest that the combination of still decent US data combined with inflationary risks from tariffs fits current higher for longer Fed bias. US yields today again add between 1-2 bps across the curve. In a broader perspective, the sideways pattern than dominates trading in US yields since end October/early November remains in place. Since Thursday last week, softer than expected EMU growth data, more than the communication from the ECB policy meeting, caused EMU interest markets to focus on growth risk rather inflation, despite yesterday’s higher than expected January CPI. Today, this move at least takes a breather with German yields rebounding about 3 bps across the curve. Still, money markets err to the side of the ECB potentially reducing the policy rate below 2.0%. The ECB will have to make an in depth revelation in case of substantial US tariffs on EMU goods. However, for now we have to feeling that enough easing is discounted. The perceived ‘controlled’ exchange of tariffs between China and the US for now apparently gives investors some hope of a similar scenario for Europe. We stay a bit cautious, agnostic on this assessment. Still the EuroStoxx50 reversed a modest early decline to currently gain 0.6%. US indices open little changed. Oil extends its decline ($74 p/b).
• On FX markets, the dollar also shows no clear direction pattern. An early risk-off related USD-bid after the Chinese retaliation measures soon evaporated. DXY currently even trades marginally lower in a daily perspective (108.4 area). Similar pattern for EUR/USD (lightly higher at 1.0345). After weathering USD strength recently, the yen today slightly underperforms (USD/JPY 155.3) but holds recent short-term consolidation range (153.75/156.75). After a solid performance of sterling of late (less risk of US tariffs?), EUR/GBP today stabilizes near 0.832, as markets look forward to Thursday’s BoE policy decision, annex ‘guidance’ of a new monetary policy report.
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