Calmer Tones Temporarily Prevail

WHERE WE STAND – Without wishing to tempt fate, conditions did feel somewhat calmer yesterday.

Admittedly, it’s a very low bar for markets to have been calmer than they were on Monday, such was the tumult seen to kick-off the new trading week, though the suspension of US tariffs on Canada and Mexico for 30 days does nonetheless seem to have soothed participants’ nerves somewhat.

Importantly, the proverbial tariff can has just been kicked down the road, with the idea of imposing levies on US imports from its two closest neighbours still not off the table entirely. In fact, this whole saga could well rumble on until the start of April, when the review ordered by President Trump into US trade policy is due to report back. Perhaps, it is at that point, that we will see tariffs shift from being used as a bargaining chip to further certain political aims, to actually being used as a measure to address trade imbalances. Still, whatever the purpose, the whole thing remains a zero-sum game.

China’s retaliation against the US having imposed an additional 10% tariff on the nation helps to provide evidence of this, with the world’s second largest economy not only imposing tariffs in kind, but also launching antitrust probes into US tech names such as Alphabet and Intel.

Still, as participants continue to digest all this, and what has become a daily deluge of trade headlines, it remains tough for anyone to have a particularly high degree of conviction when operating in such an uncertain environment.

There are a couple of things worth remembering here though. Capital preservation, for all participants, at all times, is priority number one, which reduces the risk/reward around trading tariff headlines in such a choppy environment. Furthermore, recall that Trump is no normal politician, judging his success not via opinion polls or focus groups, but by the performance of the US equity market. This, hence, gives Trump an incentive not to push things too far on the protectionism front, and could even see – in due course – the introduction of something akin to a ‘Trump put’.

Still, that’s a longer-run consideration and, while stocks gained ground yesterday, I still favour adopting a more cautious stance in the short-run, as uncertainty remains elevated, and participants chew through this week’s remaining risk events, including earnings from AMZN, and Friday’s US jobs report. I also still favour higher volatility, as the broader environment remains highly uncertain.

Meanwhile, as calmer conditions prevailed, the dollar continued its recent retreat yesterday, with the DXY slipping back towards the 108 figure. These losses were exacerbated by softer than expected JOLTS job openings data, with openings at 7.6mln in December, down from the 8.2mln seen in November. Net-net, this doesn’t change the picture much, after the solid beat in the prior print, and certainly shan’t materially alter the FOMC policy outlook. I’d be buying the dollar dip here, with participants likely to find it difficult to hold short USD positions for any particular length of time.

I also remain a gold bull here, with the yellow metal again notching fresh record highs yesterday; momentum clearly favours further gains here, with haven demand likely to linger for the foreseeable future.

LOOK AHEAD – A busy data docket awaits today though, in all honesty, it’s tough to see most of the prints significantly moving the needle.

This afternoon’s US ISM services PMI figure is probably the most interesting, with the index expectedly largely unchanged at 54.0 in January, and the employment sub-index likely to be used as a gauge of where Friday’s nonfarm payrolls figure may fall. Meanwhile, final services PMIs are due from the eurozone and UK, while the latest ADP employment figures are also on the slate, though will likely bear no resemblance to the aforementioned NFP print.

Elsewhere, the Treasury’s quarterly refunding announcement will be of interest to fixed income participants, particularly if Scott Bessent shifts issuance back out along the curve, a change from ex-Secretary Yellen’s preference for bill issuance.

Earnings, lastly, today come from the likes of Uber, Disney, Ford, and Qualcomm.