"The Market Wasn't Prepared For It": Futures Tumble, Dollar Soars As Trump Launches Trade War

US equity futures tumbled as the market prepares for Trade War 2.0, with both tech and small-caps underperforming as the dollar soared more than 1% pre-mkt, trading near a two year high and the yield curve bear flattens after Trump announced tariffs on Canada, Mexico and China, and warned that European levies are coming. The Canadian dollar fell to its lowest since 2003 and the euro weakened. As of 8:00am ET, S&P futures are down 1.7%, but off session lows having tumbled as much as 2% earlier; Nasdaq futures slide 1.7% with the Mag7 all broadly lower (GOOGL -1.8%, AMZN -2%, AAPL -1.9%, MSFT -1%, META -2%, NVDA -3% and TSLA -3%). Pre-mkt, Mag7/Semis are providing no safety and Cyclicals ex-Energy are under pressure as the market analyzes whether "Trade War 2.0 ushers the end of US Exceptionalism" according to JPM. The 2Y yield is +7bps pre-mkt as the bond market forecasts an inflationary impulse from the tariffs, indicating the market is not selling off on growth but rather on inflationary fears. Trump is said to have calls scheduled with Canadian and Mexican leaders today but warns that tariffs will be implemented on Tuesday if no deal is achieved; sets EU as the next target. Today’s macro data focus will be on ISM-Mfg, Vehicle Sales, and Construction Spending.

In premarket trading, North American stocks most exposed to tariffs fall after President Trump followed through on pledges to impose tariffs on Canada, Mexico and China. Shares in automakers, chipmakers and energy companies decline (General Motors (GM) -7.3%, Ford Motor (F) -4.2%, Tesla -3%; Nvidia (NVDA) -3%,  Broadcom (AVGO) -3%; Constellation Energy (CEG) -4%, Oklo (OKLO) -8%). Companies exposed to manufacturing or imports from China are also down: (AAPL -1.9%, DELL -3%). Here are some other notable premarket mover:

• Becton Dickinson (BDX) climbs 2% the medical device maker is considering a potential separation of its life sciences segment, which could be valued at about $30 billion, according to people familiar with the matter.
• Aptiv (APTV US) shares drop 4.9% after Raymond James downgraded the auto parts company to market perform from outperform.
• Stratasys (SSYS) rises 10% after Fortissimo Capital agreed to buy 14% of the 3D printing company.
• Prologis (PLD US) shares fall 3.0% after Raymond James downgraded the real estate investment trust to market perform.
• Triumph Group (TGI) jumps 34% after private equity firms Warburg Pincus and Berkshire Partners agreed to take the aircraft parts and services supplier private for about $3 billion, including debt.

The impact of tariffs ricocheted across global markets. It wasn't just US stocks that got hit: European carmaker shares fell, with Volkswagen AG and Stellantis NV shedding more than 5%. Crypto was also hammered as Ether plunged 11% in a broad move away from risky assets. Meanwhile, oil prices climbed on worries about a disruption to supply.

Trump’s move is the most extensive act of protectionism taken by a US president in almost a century, with knock-on effects on everything from inflation to geopolitics and economic growth. Goldman Sachs strategists said there’s a risk of a 5% slump in US stocks because of the hit to corporate earnings, while RBC estimated the range at 5% to 10%.

"He seems to be like a poker player who’s betting his whole stash on the first hand,” Steven Englander, global head of G-10 FX research at Standard Chartered Plc, told Bloomberg TV on Monday. “The market just wasn’t prepared for it.”

The worry among investors is that US tariffs will force companies to raise prices in response, causing inflation to accelerate and consumers to pull back on spending. An analysis by Bloomberg Economics estimates the tariff impact may knock 1.2% off US economic growth and add 0.7% to the core personal consumption expenditures price index. “We doubt that many companies will be able to avoid the impact of tariffs,” said Kathleen Brooks, research director at XTB Ltd. “Their actual implementation and the retaliatory tariffs that followed felt like crossing the Rubicon.”

On the other hand, the market appears confident that the tariffs will be a short-term affair, with Polymarket giving 65% odds that the tariffs against Canada are removed before May.

European stocks also tumbled as investors brace for the region to be the next target of President Trump’s trade tariffs. The Stoxx 600 is down 1.3%, as automobile and technology shares are the worst-performing sectors, while telecommunications and utilities stocks are posting the smallest losses. Here are the most notable movers:

• Atoss Software rises as much as 5.4% after the workforce management software maker was upgraded by analysts at Hauck & Aufhaeuser following its recent results
• Gulf Keystone Petroleum, Genel Energy and DNO are all pushing higher on Monday after Iraq’s parliament passed a long-awaited plan to boost payments to oil companies
• European stocks most exposed to tariffs like automakers and miners decline on Monday after US President Donald Trump followed through on pledges to impose levies on Canada, Mexico and China
• Julius Baer shares fall as much as 12%, the most since November 2023, after the bank reported adjusted pre-tax profit that came in short of expectations and didn’t announce a new share buyback program
• Speedy Hire shares drop as much as 32%, slumping to levels not seen since 2011, after the equipment rental firm warned full-year profitability will be lower than anticipated due to the weaker economic environment and a downturn in performance at its joint venture in Kazakhstan

Earlier in the session, Asian equities fell across the board with the MSCI Asia Pacific Index tumbling as much as 2.8%, its biggest drop since Aug. 5. Some markets saw outsized moves following the Lunar New Year holiday, with Taiwan’s Taiex index briefly down more than 4%. Chinese stocks in Hong Kong trimmed some of their earlier declines, while trading remains shut on the mainland. Trump imposed a blanket 10% levy on China, and 25% duties on both Canada and Mexico. The weekend announcement poured cold water over hopes that there may be negotiations between the US and major economies. In addition to concern over tariffs slowing global and regional economic growth, traders worry the measures will spur inflation in the US, and limit the Federal Reserve’s easing room.

“The Asia weakness might be more of a worry around the US tariffs causing inflation to go up again in US, thus preventing the Fed from cutting rates, which also means dollar strength relative to Asian currencies,” said Xin-Yao Ng, an investment director at abrdn Plc in Singapore.

In FX, the Bloomberg Dollar Spot Index climbed 0.9%, paring some of its earlier advance after a report that China has prepared an initial proposal for trade talks with the Trump administration. The yen reversed an earlier fall to trade slightly higher against the greenback. The Mexican peso underperforms with a 2% fall. The South African rand dropped 1.5% after Trump said the US would halt all future funding to the country because of a new law that allows the state to seize private land in the public interest.

In rates, the Treasury curve flattens as shorter-dated US bonds fall on inflation concerns - US two-year yields rise 7 bps. Bunds and gilts rally meanwhile as traders boost their ECB and BOE interest rate-cut bets. German and UK 2-year yields fall 7 bps each.

In energy markets, tariffs on imports from Canada and Mexico threaten to disrupt North America’s tightly integrated oil market and push up gasoline prices for American motorists. West Texas Intermediate jumped 2.4% above $74 a barrell. Reflecting expectations that refiners will face higher costs, gasoline futures soared as much as 6.2% in New York. Spot gold is steady near $2,795/oz. Bitcoin falls 2% to below $96,000.

The US economic calendar includes January S&P Global US manufacturing PMI (9:45am), December construction spending and January ISM manufacturing (10am); ahead this week are JOLTs job openings, ADP employment change and January jobs report. Scheduled Fed speakers include Bostic (12:30pm) and Musalem (6:30pm)

Market Snapshot

• S&P 500 futures down 1.5% to 5,978.75
• STOXX Europe 600 down 1.4% to 532.23
• MXAP down 2.4% to 179.77
• MXAPJ down 2.2% to 564.23
• Nikkei down 2.7% to 38,520.09
• Topix down 2.4% to 2,720.39
• Hang Seng Index little changed at 20,217.26
• Shanghai Composite little changed at 3,250.60
• Sensex down 0.4% to 77,166.59
• Australia S&P/ASX 200 down 1.8% to 8,379.36
• Kospi down 2.5% to 2,453.95
• German 10Y yield little changed at 2.41%
• Euro down 1.1% to $1.0253
• Brent Futures up 1.0% to $76.44/bbl
• Gold spot up 0.0% to $2,799.47
• US Dollar Index up 0.96% to 109.41

Top Overnight News

• China is preparing a list of concessions to avoid an escalation in Trump’s trade war, including purchasing more American goods, investing more in the US, a commitment to avoid yuan devaluations, curbing fentanyl precursor exports, and agreeing to treat TikTok as a commercial (not a national security) issue. WSJ
• China’s Caixin manufacturing PMI for Jan comes in at 50.1 (down from 50.5 in Dec and below the Street’s 50.6 forecast). RTRS
• BOJ board members expressed concerns at their January meeting about the weakening yen and its impact on inflation, a summary shows. BBG
• Eurozone CPI for Jan runs a bit hot at +2.5% headline (up from +2.4% in Dec and vs. the Street +2.4%) and +2.7% core (flat vs. Dec and vs. the Street +2.6%) (Bloomberg); US home values to see a ~$1.5T drop in value over the next three decades as a result of climate change. WSJ
• Trump ramped up his tariff threats to the European Union while saying he would speak with the leaders of Canada and Mexico, as stock markets sank following a hectic weekend that saw prospects for a trade war turn into reality. Trump says will "definitely" slap tariffs on the EU "very soon.” BBG
• Trump suggested that the UK might escape punitive tariffs, although he said Britain was “way out of line” and that he was considering whether to target its exports. FT
• Mexican President Claudia Sheinbaum will announce details of her government’s “Plan B” response to tariffs today. Canada’s two biggest provinces will remove US products from government-run liquor stores. BBG
• House Republican leaders want committees to land deeper spending cuts in their party-line bill to enact President Donald Trump’s domestic agenda, as they scramble to address a rebellion from key Budget Committee members who think Speaker Mike Johnson’s initial plan falls short. Politico
• Elon Musk said his DOGE team is halting some Treasury payments to federal contractors as part of aggressive cuts to US spending. He’s also in the process of shutting down USAID after staff were denied access to its systems. BBG

Trade War News

• 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.
• Elon Musk’s team got access to the US Treasury Department’s payments system. 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: NYT
• 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. 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
• Russia's Kremlin, on US President Trump, said talks and meetings are scheduled with Russia, apparently contacts are planned, "we have a planning process".
• Saudi Arabia could be seen as a possible venue for a Trump-Putin meeting, according to Russian sources: Reuters.
• The US House Budget Committee is unlikely to mark up a budget resolution this week, according to GOP leadership sources and lawmakers: Punchbowl.
• 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.
• JPMorgan said model estimates suggest that impact of a sustained 25% US tariff will be large enough to throw Mexican and Canadian economies into recession.
• 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.

Here is a more detailed look at global markets courtesy of Newsquawk

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.

Top Asian News

• 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

European bourses (Stoxx 600 -1.5%) opened lower across the board following a dire APAC session as risk is hit by US President Trump's imposition of tariffs on Canada, Mexico, and China, whilst also keeping the EU in its sight. Broad-based losses are seen across the majors. Sentiment has attempted to improve in today's session but still reside firmly in the red. European sectors are entirely in the red, with a clear defensive bias; Autos are by far the clear underperformer today, with Tech and Basic Resources following behind - all of which are digesting the Trump tariffs. US equity futures are entirely in the red, with some underperformance in the economy-linked RTY (-2.1%) as traders weigh up the inflationary/economic impact on the US.

Top European News

• EU leaders to meet on Monday talk defence; no specific discussion on US tariffs expected but issue likely to be raised, according to an official cited by CNBC. "There’s a consensus in the European Union that one way to mitigate trade tensions with the US will be by increasing energy purchases." Source added "there’s a realization that a trade confrontation with the EU is approaching."
• ECB's Kazimir said last week's 25bps rate cut moved the bank closer to its destination but is not there yet. Forecasts, services inflation and wage developments will help navigate what will happen in April and beyond.
• 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.
• ECB's Villeroy said US President Trump's tariffs will increase economic uncertainty, "it is a very worrying development", "There will likely be further rate cuts". Tariffs are brutal and will hit the autos sector. Everyone loses in this kind of protectionist trade war. Should not rule out any riposte from EU if Trump does impose tariffs on the bloc.
• German Chancellor Scholz said EU can react with its own tariffs [against the US] but cooperation is more important.
• UK Govt. Spokesperson said the UK and US have a fair and balanced trading relationship which benefits both sides of the Atlantic.

FX

• USD is firmer vs. all peers after US President Trump announced 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. The risk-aversion and potential ramifications for Fed policy are acting as the driving force for price action this morning. US ISM Manufacturing is due later.
• EUR/USD has been hit after comments from US President Trump that tariffs will definitely happen with the EU. 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. ECB's Villeroy noted that Trump's tariffs will increase economic uncertainty and there will likely be further rate cuts". Headline EZ HICP Y/Y printed just above expectations but had little impact on the Single-currency; currently around 1.0234.
• JPY is marginally firmer vs. the USD on account of its safe-haven appeal. Macro drivers for Japan are lacking and therefore, global risk dynamics are likely to remain a key driver in the near-term. USD/JPY is back above its 50DMA at 154.87 with a current session peak at 155.88.
• GBP is notably weaker vs. the USD but firmer vs. the EUR. US President Trump stated that the UK is also out of line but then suggested he is getting on well with PM Starmer. GBP is seeing shallower losses than some peers on account of its relatively smaller trade deficit.
• Antipodeans are both markedly hit by the global growth impulse from Trump's trade war as well as suffering from their direct exposure to the Chinese economy. Other macro drivers include mixed Australian data, disappointing Chinese Caixin Manufacturing PMI and wide expectations for cuts from both the RBA and RBNZ this month.
• The Canadian Dollar and Mexican Peso have both been hit hard by US President Trump's decision to impose 25% tariffs on Mexico and Canada (with the exception of 10% on Canadian energy products). Canadian PM Trudeau said the US tariffs violate the USMCA trade deal. Canada considering non-tariff measures, including minerals & energy procurement.

Fixed Income

• USTs are a little firmer today, with the main focus on US President Trump's announcement of 25% tariffs on Mexico and Canada. Seemingly the impact of inflation/economic headwinds has been outweighed by a flock to quality. The US curve is currently in bear-flattening mode with the 2s10spread narrowing by 6.9bps. The 10yr yield had been as low as 4.496% but has since stabilised around the 4.55% mark. Ahead, US ISM Manufacturing metrics.
• Bunds gapped notably higher at the open with traders wary of the negative growth impulse from the ratcheting up of trade tensions over the weekend. For the EU specifically, US President Trump that tariffs will definitely happen with the EU. ECB's Villeroy noted that Trump's tariffs will increase economic uncertainty and there will likely be further rate cut. Headline EZ HICP Y/Y printed just above expectations, but had little impact on Bunds; Mar'25 Bund has been as high as 133.26, stopping shy of the YTD peak at 133.48.
• Gilts are on a firmer footing, in-fitting with Bunds. US President Trump stated that the UK is also out of line but then suggested he is getting on well with PM Starmer. Mar'25 Gilt has hit a fresh YTD peak at 92.94. UK 10yr yield is just about holding above the 4.5% mark.

Commodities

• Choppy trade for crude prices thus far; the complex initially gapped higher when contracts opened, as traders digested a 10% tariff on Canadian energy products. Prices remain firmly in the green but have slipped off best levels, in-fitting with the risk-tone; action which continued into European morning. As it stands, WTI outperforms Brent by circa. USD 0.65/bbl - ING highlights that Canada is a key supplier of crude oil to the US and that many US refineries are configured to run on Canada's "heavier crude". WTI currently sits around USD 73.80/bbl within a USD 73.48-75.18/bbl range. OPEC+ JMMC Meeting is due at 13:00 GMT / 08:00 EST, but is unlikely to provide a meaningful recommendation.
• Spot gold is a little lower in today's session, and with price action fairly choppy; heading into the European morning, the yellow metal was considerably lower, but since pared in the European session, before falling back incrementally into the red. XAU/USD currently off by around USD 2.20/oz, trading in a USD 2772.20-2809.59/oz range.
• Base metals are entirely in the red, in reaction to the Trump tariffs on Canada, Mexico and China; 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. 3M LME copper resides in a USD 8,922.20-8,992.13/t range this morning - off worst levels seen in APAC hours.
• OPEC+ JMMC meeting to be held at 13:00 GMT / 08:00 EST, according to Kepler's Bakr.
• Several OPEC+ sources suggested the group will not adjust its output plans for now since the crude market remains fragile and amid waning demand in China, according to Bloomberg sources.
• Gas processing plant in Russia's Astrakhan region suspended operation before drone attack, according to a Governor.
• Russian oil product exports from Black sea port of Tuapse planned at 0.799mln T in Feb, vs 0.789mln T scheduled for Jan, according to Traders cited by Reuters.
• 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.
• 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.
• US President Trump's advisers reportedly concede that US frackers won’t pump much more oil, according to WSJ sources. Trump's best level to bring down oil prices would might be to persuade OPEC to add more barrels, but Saudi has told former US officials that it is unwilling to augment global oil supplies. Advisers told some oil-and-gas donors they understand the president can’t rely on US frackers to boost production in the short term. On Iranian sanctions, Trump’s team has estimated Iran’s exports could be reduced by 500-750k BPD from sanctions under consideration, sources added. Iranian sanctions discussed include targeting Chinese ports that import Iran’s oil, Iraqi oil deals with Iran and other places used to facilitate the transfer of Iranian oil.

Geopolitics: Middle East

• "Hamas leader told Al-Sharq: According to the ceasefire agreement, negotiations on the second phase are supposed to begin today ", according to Asharq News.
• "Iranian Foreign Ministry: We have not seen any sign of negotiation by the US government", according to Sky News Arabia.
• 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.

Geopolitics: 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.

Geopolitics: 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.

Us Event Calendar

• 09:45: Jan. S&P Global US Manufacturing PM, est. 50.1, prior 50.1
• 10:00: Dec. Construction Spending MoM, est. 0.2%, prior 0%
• 10:00: Jan. ISM Manufacturing, est. 49.9, prior 49.3, revised 49.2

DB's Jim Reid concludes the overnight wrap

Standby for a manic Monday as the world tries to come to terms with the “shock” tariff announcements from Mr Trump’s administration on Saturday night. I say shock but all Trump did was follow through on exactly what he’s been saying he’s going to do since November. The market has refused to take that threat seriously though, completely under-pricing the risks. So, this leaves the weekend news as a severe shock.

You have probably all seen the details by now so we’ll only briefly recap the story and focus on some of the implications. The US announced 25% additional tariffs on imports from Canada (ex-energy imports at 10%) and Mexico, and a 10% additional tariff on China. These will start on February 4th and will be implemented under the International Emergency Economic Powers Act (IEEPA), citing a national emergency due to “the extraordinary threat posed by illegal aliens and drugs, including deadly fentanyl”. In response, Canada has retaliated by announcing 25% tariffs on CAD155bn of US goods, of which CAD30bn start on Tuesday and the remainder in three weeks' time. Mexico’s President said that she’d instructed the Economy Minister to “implement the Plan B” they’d been working on and has signaled that the details of this plan will come today. China have said they would “take necessary countermeasures to defend its rights and interests”. The Commerce Ministry also said they’d file legal proceedings at the WTO.

These three countries make up around 40% of imported US goods, at around $1.35tn. To put this is some perspective, in the first Trump administration, the US targeted around $350bn of Chinese goods. So this is huge versus anything seen for decades with regards global trade and at face value takes us back to the protectionist period between the two world wars in terms of scale of tariffs. The average duty rate on US imports would move from 2.3% to around 10% assuming no trade redirection.

Before we look at the implications, we should say that it’s still possible these tariffs get negotiated away within hours, days or weeks. It’s also possible there are legal challenges which reverse their implementation. It will be interesting how the US courts respond. Trump doubled down on social media yesterday saying “This will be the golden age of America! Will there be some pain? Yes, maybe (and maybe not!). But we will make America great again, and it will all be worth the price that must be paid. We are a country that is now being run with common sense - and the results will be spectacular!!!” Last night, Trump did say that we would hold separate calls with the leaders of both Canada and Mexico on Monday morning, but added that “I don’t expect anything very dramatic” from these. So while we can’t rule out a last-minute deal, there is no sign that he is about to enter into a grand bargain and his “pain” comments are a warning to those who think he'll backtrack if US equity markets fall. Separately, last night, Trump also renewed the threat of tariffs against the EU, saying they “will definitely happen” and “it’s going to be pretty soon.”

In terms of implications, if implemented and prolonged, Canada and Mexico would likely go into an imminent recession and potentially see a bigger shock than Brexit was for the UK. It should ensure US core PCE hovers around (or above) 3% rather than dip below 2.5%. It would make it more likely that our view that the Fed won't cut this year proves correct and if growth holds up it could encourage a hike. The US is less exposed to the retaliatory tariffs announced so far in terms of size relative to their economy, but you would still expect several tenths of a percent to be shaved off GDP although how much the raised tariff revenue allows for more tax cuts provides uncertainty. Of course, the dollar should initially be higher.

Although tariffs have not been levied on the EU, this is still a serious blow given what will now probably lay ahead. Aside from direct tariffs, many German automakers serve the US market via Mexico, where they produce final and/or intermediate goods. If the EU has to endure 10% tariffs, our economists' analysis has previously suggested it would be worth 0.5-0.9% off GDP all other things being equal. We have budgeted 0.5pp in our current assumptions. The weekend news does makes it more likely our 1.5% terminal rate call on ECB rates by December will materialise. Markets have been hovering comfortably above 2% this year.

In terms of the reaction of markets in Asia, Taiwan’s Taiex (-3.80%) is the biggest underperformer after falling -4.4% at the open, led by a plunge in semiconductor heavyweight TSMC. Elsewhere, the KOSPI (-3.12%) is also tumbling with the Nikkei (-2.42%), the S&P/ASX 200 (-1.83%) and the Hang Seng (-1.25%) also seeing sharp losses in early trade. Meanwhile, Chinese markets remain closed for the Lunar New year holiday and are going to reopen on Wednesday.

US and European equity futures are lower with those on the S&P 500 -2.04%. Stoxx 50 and DAX futures are -2.78% and -2.45% lower as I type. 2yr Treasuries are +4.1bps higher at 4.24% while yields on 10yr USTs are -3.2bps lower trading at 4.51%. In terms of market pricing, money markets have reduced the amount of Fed rate cuts priced by the December meeting by -4.7bps to 42bps.

In FX markets, the Canadian dollar is -1.50% lower, at 1.4762 against the dollar, its lowest since 2003 while the Mexican peso (-2.77%) is also weakening, trading at 21.27 against the dollar, touching its lowest since March 2022.

Early morning data showed that China’s factory activity grew at a slower pace in January amid US tariff fears. The Caixin manufacturing PMI grew 50.1 in January (v/s 50.6 expected) down from 50.5. The Caixin data comes just a week after the official PMI data, which showed manufacturing sector activity unexpectedly shrinking in January.

A preview of the week ahead feels a little parochial now given the weekend news but we’ll plough ahead. In the US, we have the jobs report on Friday, and the ISM indices (today and Wednesday) leading the way. Elsewhere, the focus will be on the BoE decision in the UK (Thursday) and Alphabet (Tuesday) and Amazon (Thursday) earnings as part of 124 S&P 500 and 77 Stoxx 600 companies reporting.

Looking first at payrolls, our economists look for a moderation in the headline (175k vs. +256k previously) and private (150k vs. +223k) release but with higher uncertainty than usual around this. Firstly, the LA wildfires occurred during the survey week, which our economists estimate could reduce payrolls by -20k based on historical comparisons. Secondly, January's gains have been large over the last two years with the low layoff rates perhaps colliding with aggressively seasonal adjustments, although it could have been warm weather that was not prevalent this January. Thirdly, there are BLS benchmark revisions to deal with after last August's preliminary estimates. This could also influence the unemployment rate and make the data discreet from the December release which would now have a different population control to January's with the new revisions.
Staying in the US, other notable US data includes the University of Michigan's consumer sentiment on Friday (DB forecast 73.1 vs 71.1) including the inflation expectations series which has seen some extreme partisan differences in expectations since the election. See my CoTD here on this for a fascinating chart. There will also be the US Treasury borrowing estimates (today) and the quarterly refunding announcement (Wednesday) with our strategists' preview of this here. There are also lots of Fed speakers this week and this will give them their first chance to opine on possible policy implications of the Trump tariff news. We have a selection of these highlighted in the day-by-day week ahead calendar at the end.

For the Bank of England, our UK economist expects the MPC to deliver its third rate cut of the cycle, taking Bank Rate to 4.5% (75bps below its peak) with a 8-1 vote tally. There will also be new economic projections from the MPC as well as a supply projections update from the Bank. See more in our economist's preview here. We’ll also see January CPI for the Eurozone today with the regional numbers already out. In China, notable releases feature the Caixin PMIs (services on Wednesday after manufacturing earlier today) after the official gauges released last week came in below forecasts. Remember China is on holiday until Wednesday.

Looking back at last week now, assuming you’re still here after a lengthy edition this morning. It was a week bookended by equity sell-offs, with a surprisingly blissful calm in-between. The first came with major US tech sell-off on Monday, as the release of DeepSeek’s new AI model led to major questions about their valuations. And while US equities rebounded from that, the S&P 500 then fell by more than 1% in the latter part of Friday’s session after comments from the White House press secretary and then Trump himself confirming the February 1st tariff plans that we heard more about on Saturday. Ultimately, the S&P 500 ended the week down -1.00% (-0.50% Friday). Tech stocks were overall underperformers, with the NASDAQ down -1.64% over the week (-0.28% Friday) as some of the most affected stocks struggled to recover, with Nvidia’s share price down -15.81% (-3.67% Friday). But the equity softness broadened on the tariff news, with the equal-weighted S&P 500 falling -0.77% on Friday (and -0.54% over the week). By contrast, European markets, which closed before the headlines from the White House, saw a stronger performance, with the STOXX 600 up +1.78% (+0.13% Friday) to reach a new record high, in what also marked its 6th consecutive weekly gain.

Meanwhile, sovereign bonds rallied, with the 10yr Treasury yield falling -8.1bps over the week to 4.54% despite a +2.4bp increase on Friday on the tariff headlines. The bulk of the decline took place on Monday, as investors priced in more Fed rate cuts amidst the sharp equity decline. Yields also declined in Europe, with 10yr bund yields down -11.0bps to 2.46%. This mostly took place towards the end of the week, including -5.9bps on Friday, following growth and inflation data that was softer than expected. In particular, the Euro Area economy was stagnant in Q4, contrary to expectations for +0.1% growth. Then on Friday, France’s flash CPI prints for January surprised on the downside, with EU-harmonised CPI at +1.8% (vs. +1.9% expected), while Germany’s was in line with expectations at +2.8%.

Elsewhere in markets, gold prices closed at a record high of $2,798/oz, having risen +1.00% last week (+0.10% Friday) in their 5th consecutive weekly gain. But several other commodities lost ground, with Brent crude oil down -2.22% (-0.14% Friday) to $76.76/bbl, whilst copper fell -0.97% (-0.66% Friday). In the meantime, Euro IG credit spreads closed at their tightest in three years, at 91bps. However, US credit spreads widened, with IG spreads up +1bps, and HY spreads up +5bps.