Tariff To-And-Fro Continues

WHERE WE STAND – Right, I’m sure I’m not the only one struggling to keep up with the frenzy that’s been the last day or so in financial markets.

US tariffs on Mexico? On Saturday, they were at 25%. Now, they’ve been scrapped – for a month, anyway – and so have Mexico’s retaliatory measures.

US tariffs on Canada? Well, they’ve also been paused for 30 days, as have Canada’s retaliatory measures, to allow time for further talks.

And of those on China? Less good news, those have now gone into effect, while China have also retaliated in kind, levying tariffs on US imports, including coal and LNG, while also announcing an antitrust probe into Google.

What of a US sovereign wealth fund? That’s new! Seemingly, coming out of the blue from President Trump yesterday, though murmurings that the fund could be used to purchase TikTok seem rather fanciful.

I guess the over-arching question is what the nub of all this is?

On tariffs, it seems that what we have here is, by and large, a repeat of what happened recently with the US imposing tariffs on Colombia. Tariffs get imposed, after a game of ‘will he or won’t he’; the imposition of those tariffs forces the other party to the negotiating table; Trump extracts ‘concessions’ during those talks; tariffs are subsequently cancelled, or postponed.

This, furthermore, helps to show that tariffs are about negotiating, and about President Trump strong-arming other nations into pushing ahead his political priorities, in this case the border. In reality, tariffs appear to have little-to-nothing to do with trade agreements, or narrowing the US trade deficit, whatever pretences might be thrown around.

That, though is little solace to market participants, who are continuing to adapt to an environment where the next headline could turn the macro narrative completely on its head, before the headline after that turns things around once more!

I’m already bored of this nonsense, yet there’s still 3 years and 50 weeks of it left to come.

Of course, the most obvious way in which this uncertainty has materialised in financial markets is via higher vol, both implied and realised. That said, the VIX hasn’t breached the 20 handle yet, which I’d argue we should probably be trading comfortably above, with implieds in the Treasury complex, and in G10 FX, also looking somewhat too subdued.

Elsewhere, it remains logical for participants to continue to seek shelter in safe-havens, which made it somewhat unsurprising that spot gold rallied to fresh record highs to kick-off the new trading week. The yellow metal has certainly started to shine once more, with momentum firmly favouring further upside here, as the bulls look to be firmly in control from both a technical, and a fundamental perspective.

It’s also still tough sit in short USD positions in this sort of an environment, where policy uncertainty remains elevated, and where Trump is slapping tariffs on trading partners seemingly on a whim. Furthermore, in addition to this haven demand, while tariffs will have a detrimental impact on growth across the board, this impact is likely to be least felt in the US, leaving the greenback as the ‘best of a bad bunch’ when it comes to G10 FX.

In equities, for the first time in what feels like forever, I’m keen to adopt a more cautious stance, at least in the short-term. While stocks pared intraday losses and recovered well yesterday, risk assets remain susceptible to another knock lower in the short-term, as headwinds stemming from fiscal uncertainties remain strong, and as a packed calendar of event risk – including GOOGL and AMZN earnings, as well as Friday’s US jobs report – could provide an incentive for participants to further trim their exposures.

I still think the longer-run path of least resistance continues to lead to the upside, propelled by solid economic, and strong earnings, growth, though concurrently think it prudent to adopt a more conservative stance until some greater clarity on the outlook is obtained.

What is, perhaps, the most perplexing thing about all this, setting aside the use of tariffs as a negotiating tool, is the following – Trump ran a campaign seeking higher equities, lower interest rates, and a weaker dollar; Trump, in office, is implementing policies which, in fact, engineer the polar opposite of those aims.

Answers on a postcard, please, as to how one can square that particular circle.

LOOK AHEAD – Another day of Trump-related headline watching likely awaits, though the data docket nevertheless presents a few interesting events for participants to get their teeth into.

From the US, the latest JOLTS job openings figures will be of interest, particularly after the substantial beat seen in November, with December’s factory orders data also due. Meanwhile, New Zealand provide fourth quarter jobs stats, with the NZD OIS curve fully pricing a 50bp cut at the new meeting on 19^th Feb, while speeches are due from the Fed’s Daly and Bostic, plus the ECB’s Villeroy.

Lastly, another busy day of corporate reports awaits, with figures due from the likes of PayPal, Spotify, Pfizer, and AMD. The main event though, will be the after-hours report from Alphabet, with GOOGL options pricing a move of +/-5.7% in post-market trade following the earnings release.