- Trump signed a tariff order that confirms 25% tariffs on Mexico and Canada (with the exception of 10% on Canadian energy products) and 10% additional tariffs on top of existing levies for China.
- Canada has announced retaliatory action, Mexico is expected to announce its measures later today, China is to challenge tariffs at the WTO.
- APAC stocks sold off, US equity futures are lower (ES -1.9%, NQ -2.4%), European futures point to a notably lower cash open (Euro Stoxx 50 future -2.3%)
- DXY is sharply higher and went as high as 109.88, EUR/USD is on a 1.02 handle, Cable is sub 1.23, JPY is more resilient than peers but ultimately weaker vs. USD.
- Crude futures surged at the open, US 10 yr yield has pulled back but has stabilised above the 4.5% mark.
- Looking ahead, highlights include EZ HICP, US ISM Manufacturing, Fed SLOOS, OPEC+ JMMC Meeting Speakers including Fed’s Bostic & Musalem, Treasury Financing Estimates.
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TRADE WAR
- White House said US President Trump signed the tariff order effective February 4th which confirms 25% tariffs on all Mexican and Canadian imports to the US with the exception of a 10% tariff on Canadian energy products, while imports from China are subject to an additional 10% tariff on top of existing levies with no exclusions offered. The order stated the new tariffs don’t apply to goods loaded onto vessels or in transit before February 1st and stated the President can remove new Canadian tariffs if enough steps are taken to reduce the health crisis but also included a retaliation clause that calls for further action which would likely be increased tariffs.
- US President Trump said tariffs will definitely happen with the EU, while he added the UK is out of line and the EU is really out of line but also noted that he is getting along well with UK PM Starmer, while he stated there are tremendous deficits with Canada, Mexico, China and the EU. Furthermore, Trump said he will be speaking with Canadian PM Trudeau on Monday morning and will also be speaking with Mexico on Monday.
- Canadian PM Trudeau said the new US tariffs violate the USMCA trade agreement and Canada will impose 25% tariffs on CAD 155bln of US goods with CAD 30bln in tariffs to take effect on February 4th and the rest starting in 21 days. Furthermore, Trudeau said they are considering several non-tariff measures including those relating to minerals and energy procurement, while he added that Canada and Mexico are working together to face the US tariffs.
- Canadian senior government official said the Canadian tariffs will not apply to goods in transit and that the actions of the US are a violation of the obligations of the free trade agreement, while the official added that Canada’s countermeasures will have an impact on the Canadian economy and the government has a plan to try to offset them.
- Canadian Ambassador said she is hopeful that the Trump tariffs don’t come into effect on Tuesday and that US consumers should know retaliatory tariffs are not actions Canada wants to do.
- Mexican President Sheinbaum ordered the start of a retaliatory tariff plan against the US and stated that tariffs will not fix problems but dialogue will, while it was separately reported that Mexico’s Economy Minister said ‘Plan B’ is underway in response to US tariffs. President Sheinbaum later commented that 25% tariffs will have a great impact on both the US and Mexico’s economies, while she added that they categorically reject the US statement that Mexico has ties to drug cartels and stated the US has done nothing to stop the illegal sale of drugs in its own country.
- China’s Commerce Ministry said China will take necessary countermeasures to new US tariffs and that Fentanyl is America’s problem. Furthermore, it said China will challenge the new US tariffs under WTO and that there are no winners in a trade war, while it urged the US to engage in frank dialogue and strengthen cooperation.
- Goldman Sachs believes US tariffs on Mexico and Canada are to be short-lived.
- China is to renew a pledge not to devalue the yuan to help its exporters and it is to offer to reinstate the 'Phase One' deal as part of its opening bid for trade negotiations, while it plans to include an offer to make more investments in the US and is to treat TikTok largely as a commercial matter in negotiations, according to WSJ.
- EU said it rejects US President Trump's decision to hit Canada, Mexico and China with tariffs and it would respond firmly if the US imposed tariffs on Europe, according to FT.
- Yale’s non-partisan policy research centre Budget Lab preliminary estimates project US PCE prices to increase by 0.76% and household purchasing power to be reduced by an average of USD 1250, while US real GDP is projected to contract by 0.2% in the medium run, as an impact from US President Trump’s tariffs.
US TRADE
EQUITIES
- US stocks and bonds ended Friday's session lower with a focus on tariffs as sentiment was initially boosted by reports that Trump was set to postpone the tariffs by 1 month to March 1st. However, the White House then announced this was false and that Canada and Mexico would be hit with 25% tariffs from Saturday, February 1st, while China would face 10% tariffs. This set the tone for the remainder of the session with CAD and MXN selling off while T-Notes were pressured into settlement, and bear steepening.
- SPX -0.51% at 6,040, NDX -0.14% at 21,478, DJIA -0.75% at 44,544, RUT -0.97% at 2,285.
- Click here for a detailed summary.
NOTABLE HEADLINES
- Elon Musk’s team got access to the US Treasury Department’s payments system, according to NYT. It was separately reported that Elon Musk said they are in the process of shutting down the United States Agency for International Development and that it is beyond repair.
- US Transport Secretary Duffy said the US pilot messaging system experienced a temporary outage on Sunday.
- Wall Street is concerned about Treasury Secretary Scott Bessent’s approach to government borrowing, WSJ reports. Investors credit a 2023 strategy of relying on short-term Treasurys with stabilising markets, but Bessent has criticised this method amid fears of increased borrowing under Trump’s administration, WSJ reports.
APAC TRADE
EQUITIES
- APAC stocks sold off as all focus was on US President Trump's latest tariff action over the weekend in which he signed a tariff order which confirms 25% tariffs on Mexico and Canada (with the exception of 10% on Canadian energy products) and 10% additional tariffs on top of existing levies for China.
- ASX 200 declined with all sectors suffering firm losses while mixed data did little to spur demand.
- Nikkei 225 slumped firmly beneath the 39,000 level with Japanese automakers notably spooked by tariff jitters.
- Hang Seng conformed to the negative mood on return from the Chinese New Year holiday with demand constrained after disappointing Chinese Caixin Manufacturing PMI and amid the continued absence of mainland participants.
- US equity futures (ES -1.9%, NQ -2.4%) slumped as President Trump's tariff order resulted in a blood bath for stocks.
- European equity futures indicate a negative cash open with Euro Stoxx 50 future down 2.3% after the cash market closed higher by 0.1% on Friday.
FX
- DXY strengthened after President Trump's tariff order against Canada, Mexico and China which heavily weighed on CAD and MXN, while CNH was also pressured but to a lesser extent. Trump's tariff order prompted Canadian PM Trudeau to announce 25% retaliatory tariffs on USD 155bln of US goods and Mexican President Sheinbaum also ordered the start of a retaliatory tariff plan against the US, while Trump announced that he will be speaking with Canadian PM Trudeau on Monday morning and will also be speaking with Mexico.
- EUR/USD gapped beneath the 1.0300 level amid the surge in the greenback and with President Trump's sight also set on Europe regarding tariffs as he noted that tariffs will definitely happen with the European Union and that the EU is really out of line.
- GBP/USD retreated to sub-1.2300 territory as currencies gave way to the dollar strength, while Trump provided some mixed comments on the UK as he stated that the UK is also out of line but then suggested he is getting on well with PM Starmer.
- USD/JPY gained amid the firmer buck although the upside is capped with Japan's currency helped by haven demand.
- Antipodeans suffered with AUD/USD at its lowest since early 2020 amid the broad risk-off mood, mixed Australian data, disappointing Chinese Caixin Manufacturing PMI and wide expectations for cuts from both the RBA and RBNZ this month.
FIXED INCOME
- 10yr UST futures were initially choppy but ultimately gained as the headwinds from the inflationary aspects of the latest tariff actions were counterbalanced by a flight to quality.
- Bund futures rallied at the open and climbed above the 133.00 level as risk assets were spooked by Trump's tariff order.
- 10yr JGB futures retreated early in the sessions as Japan's 10yr yield rose to its highest since 2011 although JGBs gradually rebounded on haven demand.
COMMODITIES
- Crude futures surged at the open following Trump's tariff order to impose 25% tariffs on imports from Canada and Mexico with the exception of 10% on Canadian energy products, although prices are well off today's best levels amid the broad risk-off conditions and with demand also not helped by disappointing Chinese Caixin Manufacturing PMI data.
- Iraq’s parliament approved the compensation plan to resolve the Kurdistan oil dispute and seeks to expedite northern exports. It was separately reported that Iraq’s northern Khor Gas field was targeted by a drone attack although no damage was reported and production remained unaffected.
- Alberta’s Premier called for an immediate effort to build oil and gas pipelines to Canada’s coast and stated that Trump’s tariffs will harm people and strain US-Canada ties.
- Goldman Sachs said a potential tariff-driven decline in US natural gas imports from Canada is too small to significantly raise natural gas prices, while medium-run risks to oil prices are skewed downside because persistent broad tariffs would weigh and it expects limited near-term additional effects on global, Canadian, and Mexican crude prices.
- Vitol said it expects global oil demand to peak at almost 110mln BPD at the end of the decade and then retreat to around the current levels of about 105mln BPD in 2040, according to FT.
- Spot gold was pressured and retreated beneath the USD 2,800/oz level as the dollar strengthened against its peers.
- Copper futures retreated as Trump's latest tariff offensive and potential retaliation pose a risk to the global economy, while the red metal's largest buyer also remained absent from the market for the Spring Festival.
- JPMorgan said US tariffs keep them near-term bearish on base metals and reinforce their bullish gold view, while it added that LME base metals prices are likely to face stiff near-term bearish pressure on growth concerns, macro risk-off, and USD strength.
CRYPTO
- Bitcoin extended on the declines over the weekend with prices near to the USD 93,000 level and Ethereum suffered a double-digit percentage slump as risk assets took a hit.
NOTABLE ASIA-PAC HEADLINES
- BoJ January Meeting Summary of Opinions stated one member said Japan public's inflation expectations are heightening as inflation exceeds 2% for four straight years and a member said raising rates at this timing would be sufficiently neutral when compared with average market expectations. It was also stated that Japan's economy is resilient enough to absorb potential downside stress from the new US administration's policies and that BoJ's policy flexibility has increased as the Fed is likely to pause on rate hikes. Furthermore, a member said real interest rates remain deeply negative even after a rate hike and need to keep raising rates if the economy and prices are on track
DATA RECAP
- Chinese Caixin Manufacturing PMI Final (Jan) 50.1 vs. Exp. 50.5 (Prev. 50.5)
- Australian Building Approvals (Dec) 0.7% vs. Exp. 1.0% (Prev. -3.6%, Rev. -3.4%)
- Australian Retail Sales MM Final (Dec) -0.1% vs. Exp. -0.7% (Prev. 0.8%)
- Australian Retail Trade (Q4) 1.0% vs. Exp. 0.8% (Prev. 0.5%)
GEOPOLITICS
MIDDLE EAST
- Israeli PM Netanyahu spoke on Saturday with US special envoy Steve Witkoff and then travelled to the US on Sunday for a meeting with US President Trump, while Witkoff will speak with Qatar’s PM and Egyptian representatives.
- Israel’s military said its aircraft fired to repel a suspicious vehicle moving towards northern Gaza without passing through the inspection route, in violation of ceasefire terms, while it was separately reported that four Palestinians were wounded in an Israeli strike on a car on Gaza’s coastline.
- ICRC announced 3 hostages were transferred out of Gaza to Israel and 175 Palestinian detainees were transferred from Israeli detention centres to Gaza and the West Bank.
- Qatar’s PM called on Israel and Hamas to immediately begin negotiations on the second phase of the Gaza ceasefire and said that Qatar is prepared to host released Palestinian prisoners if they choose to come but added there is no clear plan for when negotiations towards the second phase will begin.
- US President Trump and Egyptian President Sisi discussed complicated issues and crises in the Middle East during a phone call, as well as discussed the need to strengthen economic and investment relations.
- Hamas political bureau’s deputy head is to visit Moscow on Monday for talks scheduled at the Russian Foreign Ministry, according to RIA.
RUSSIA-UKRAINE
- Ukrainian President Zelensky said a Russian aerial bomb destroyed a boarding school in Russia’s Kursk region even though dozens of civilians were there, while Ukraine’s military later stated that four died and dozens were injured in the Russian strike on the boarding school.
- Ukrainian President Zelensky’s aide said calls by US President Trump’s aide for a truce followed by an election is a failed plan if that is all it consists of.
- Ukrainian Air Force said on Sunday morning that 40 drones were launched by Russia during an overnight strike, while Russia’s Defence Ministry said Russia shot down a HIMARS projectile and 44 Ukrainian drones over the prior 24 hours and that Russia hit military airfields and fuel storage facilities in Ukraine, according to TASS. It was also reported that Russia launched 165 missiles and drones at Ukraine during an attack on Saturday.
- Russian aviation watchdog said it suspended flights at several airports to ensure safety and Russian officials said several Russian regions are under the threat of drone attacks. Furthermore, it was later reported that a Ukrainian drone attack sparked a fire at an oil refinery in Russia's Volgograd region although the fire has since been contained.
OTHER
- North Korea said US Secretary of State Rubio’s comments do not help US interests and it warned that North Korea will respond strongly to hostile US provocations, while it noted that the US new missile defence system plan makes it necessary for North Korea to progress its nuclear deterrence, according to KCNA.
- US President Trump ordered precision military air strikes on the senior ISIS planner and other terrorists he recruited and led in Somalia.
- US President Trump said Venezuela has agreed to receive all illegal migrants captured in the US, while it was later reported that the Trump administration moved to terminate protected status for hundreds of thousands of Venezuelans in the US, according to NYT.
- US President Trump said South Africa is treating certain classes of people very badly and he will be cutting off all future funding to South Africa until a full investigation of this situation has been completed.
- US Secretary of State Rubio called Chinese presence at the Panama Canal unacceptable and told Panamanian leaders that the US would protect its rights under the Panama Canal Treaty if Panama didn’t move to oust Chinese-connected companies near the canal, according to Bloomberg. Furthermore, Panama’s President Mulino said the meeting with Rubio was highly respectful and cordial, while Mulino added sovereignty over the Panama Canal is not up for discussion and that he will not renew the Panama-China agreement over the silk route.
- Taiwan's President said they welcome healthy exchanges with China and that there should be dialogue between Taiwan and China, with the aim of peace.
EU/UK
NOTABLE HEADLINES
- ECB’s Knot expects US tariffs to lead to higher interest rates and a weaker euro, while he said the best response to US tariffs would be to do nothing although he expects retaliation.
- S&P affirmed Germany on Friday at AAA; Outlook Stable.
