By Michael Brown, Senior Research Strategist at Pepperstone
DIGEST – Trade was risk-averse to start the week yesterday, as participants sought shelter amid Trump’s tariff threats over Greenland. Today, geopolitics, a potential Supreme Court IEEPA ruling, and UK jobs data are in focus.
WHERE WE STAND – If I had just a couple of words to sum up trading conditions yesterday, I’d plump for ‘predictable’ and ‘contained’.
Predictable, as what we saw was exactly what one would expect – broadly, a risk-averse day, with European equities underperforming, havens such as gold in demand, and the dollar facing headwinds.
Contained, as all of that was, in the grand scheme of things, relatively orderly, and not especially sizeable or violent in nature, at least not compared to some of the risk-off moves that we saw on the back of tariff threats last year.
That latter point, to my mind, speaks to the market’s belief that what we’re seeing in terms of President Trump’s rhetoric is very much a negotiating gambit, aimed at obtaining leverage in negotiations, as opposed to a serious policy proposal that the Admin are likely to follow-through on. This also remains my working assumption, that what we’re again seeing here is the ‘escalate to de-escalate’ strategy panning out meaning that, sooner or later, some sort of ‘deal’ will be agreed, an off-ramp will be taken, and a U-turn will be pulled on the trade front in due course.
Understandably, though, those running a book did seek to dial down risk exposure, and place some hedges during Monday’s session, lest this time prove to be different, amid the slim chance that Trump does actually follow through on his threats. Frankly, one can’t not hedge the most obvious short-term left tail risk that now exists, as the ‘boy who cried wolf’ excuse won’t cut much ice if it were to eventuate.
The risk-off nature of Monday’s trade, then, makes a lot of sense, even if I maintain my view that it will be relatively short-lived, and that equity dips remain buying opportunities, as and when the headline noise dies down a little, thus allowing participants to re-focus on what remains a solid underlying bull case. Selling pressure in stocks on Monday, though, wasn’t indiscriminate, but somewhat rational, with Europe underperforming amid renewed trade risks, and those sectors most exposed to potential tariffs – namely, autos and luxury – lagging the pack.
Elsewhere, the dollar traded broadly softer on the day, as FX market participants focused less on the risks of tariffs coming to pass, and more on how the latest developments once again speak to the volatile and unpredictable nature of US policymaking. This does make me somewhat nervous about my year-ahead view that solid economic growth may permit a return to the idea of ‘US exceptionalism’, though the DXY remains above its key moving averages for now, and the selling pressure has thus far been modest in nature, so I shan’t be bailing on that view just yet.
Nor shall I be bailing on my bullish stance on precious metals, not least considering that it continues to bear fruit. Gold and silver both printed fresh record highs amid haven demand yesterday, with this latest geopolitical saga simply adding further fuel to a fire that’s already been raging for quite some considerable time now. $5,000/oz in gold and $100/oz in silver remain the levels on my radar, though wouldn’t be getting too greedy here, particularly when it comes to the parabolic move in silver, as those round numbers could well prove very stiff resistance indeed.
LOOK AHEAD – Geopolitical events will remain in focus today, particularly any talks that may take place in Davos, while market participants will also be on alert for a potential US Supreme Court ruling as to the legality of Trump’s tariff powers under the IEEPA.
Besides that, the calendar has a couple of notable European releases on it. The latest UK jobs report is out this morning, and is likely to point to ‘more of the same’ as slack continues to emerge at a rapid rate, earnings growth continues to cool, and with payrolls set to have fallen for a fourth month running. Meanwhile, we also receive this month’s German ZEW sentiment surveys, though note that data will have been collected before the latest tariff threats came to light.
There are a few interesting earnings reports on today’s docket, too. 3M (MMM) report before the open, with the firm typically being a decent bellwether for the economy at large, while attention after the close will turn to Netflix (NFLX), with a focus particularly on not only whether user growth has peaked, but also any commentary around progress of the deal to purchase Warner Bros. Discovery (WBD). Options on NFLX stock, incidentally, price a punchy +/- 6.9% move in the post-market session.