The Wait For Tariff Clarity Goes On

WHERE WE STAND – Day two of the ‘golden age of America’ yesterday, which also represented day 2 of participants waiting patiently – or otherwise – for clarity on President Trump’s trade policy, and tariffs that may be imposed.

Clarity, on that front, remains elusive.

The lack of fresh information – barring overnight Tuesday musings from Trump that tariffs on Canada and Mexico may come on 1^st February – led to some continued downward pressure being exerted on the dollar. I suppose most of this is mean reversion, given the chunky USD rally that we saw towards the back-end of last week, though there could also be a case to be made that the longer we go without a concrete tariff announcement, the lower the probability of a ‘worst case scenario’ universal tariff plan, at least in the minds of market participants.

I’m rather reluctant to buy into that thesis though, in all honesty, as although tariffs are clearly a negotiating ploy, the Trump Administration are set on going down this route. As a result, while participants play whack-a-mole with each incoming headline, I’d be inclined to be buying dollar dips, at least in the short-term, particularly with the US economy continuing to vastly outperform its DM peers too.

I also like long vol still, with the present elevated degree of policy uncertainty showing no sign of dissipating any time soon. As mentioned yesterday, participants will continue to struggle to accurately discount future policy moves, because a concrete plan as to future policy doesn’t appear to exist. While vol should, consequently, rise across most major asset classes, as a relatively crude metric I’d argue that the VIX should probably be sat north of 20, not languishing around 15, where the index has averaged over the last couple of years.

That said, I still see the path of least resistance, albeit a choppy one, leading higher on Wall Street. The incoming administration have an incentive to keep the market buoyant, given how the performance of the Dow tends to be Trump’s personal yardstick of his own success, with solid economic and strong earnings growth likely ensuring that the rally remains intact. Although, with a comfort blanket in the form of the ‘Fed put’ no longer present, equities are somewhat more exposed to external shocks than they have been over the last couple of years.

Away from yesterday’s US political shenanigans, there were a few other notable developments.

The JPY traded a touch firmer, testing the 155 handle to the downside, after BoJ sources reports via Kyodo indicated that the Bank are “moving towards” a rate hike at this Friday’s meeting. By my count, those are the fourth set of sources reports of this ilk, hence a hike in the early hours of Friday morning would hardly come as a surprise. Focus, then, shifts to Ueda’s guidance as to the policy outlook, though any hawkish overtures here must be caveated by uncertainties created as a result of Trump’s potential future policies. Buy the rumour, sell the fact, springs to mind for the JPY here.

Here in Europe, Tuesday brought some grim German data, in the form of the latest ZEW sentiment surveys, where the expectations index fell to 10.3, with a further decline likely next month ahead of mid-February elections. Still, that didn’t move the needle for the EUR too much, which kept its head above the 1.04 mark for most of the day, perhaps implying that we are at that ‘peak pessimism’ point for the common currency at long last.

Finally, in the UK, Novembers jobs report was a mixed bag – unemployment, rising to 4.4%, the highest level since last May, while regular pay climbed 5.6% YoY, its fastest pace since last summer. Though a 25bp BoE cut in early-February remains nailed on, earnings rising at such a clip is clearly incompatible with a sustainable return to the Bank’s 2% inflation aim, and is likely to see the present pace of gradual, quarterly 25bp cuts continue for now.

LOOK AHEAD – A quiet day ahead today, with just the latest UK public borrowing data, and 20-year US supply of note. Of course, political developments in Washington DC will also be in focus.