Weekly focus: A week of politics moving markets

Geopolitics dominated headlines and moved markets this week. US president Donald Trump wrote on Saturday that he would use tariffs against eight European countries to support his Greenland policy, putting an additional 10% on large parts of European goods already from 1 February. On Wednesday though, the message was that the parties are talking and that both tariffs and military intervention are off the table. Markets reacted early in the week with significant declines in equity prices and a weaker USD, not unlike the reaction to the "Liberation Day" tariff announcement in April although on a smaller scale. In the end, equity markets mostly recovered as the situation deescalated. However, USD ended the week about 1% weaker against the EUR, taking it back close to the levels at the beginning of January. US bond markets had a negative week. In part, that could also be seen in relation to the negative sentiment around US assets. However, bond yields increased globally following a large move up in Japan, where 10-year yields are now at their highest level since the 1990's.

This is related to the week's other big political event, the calling of an election in Japan on 8 February and the election campaign for that. Both the opposition and the government have promised to temporarily cut taxes, especially on food, and it seems likely that fiscal policy will become more expansionary. The Bank of Japan did not change interest rates at their meeting this week following the hike in December, but the bank did raise its inflation forecast and it is increasingly expected that rates will be hiked in April as is also our call. However, the Bank of Japan is not immune to political pressure and there are doubts as to whether it will be able to get inflation back to target soon. The JPY has been under pressure for a long time, and the pressure intensified this week before a sudden correction on Friday. It is possible that the central bank intervened in the market to support the currency.

In the euro area, composite PMIs remained unchanged at 51.5 in January, indicating that the modest economic expansion continued into 2026. Date due Friday will likely show that GDP growth was around 0.5% q/q in Q4.

Political events could of course take the limelight again next week but barring that, the most important thing to watch from a market perspective is likely to be the monetary policy decision in the US. There is little chance of a policy change at the meeting, but markets will be looking for clues about the timing of the next cut. We should also expect a lot of questions and discussion about the administration's legal and political attempts to put pressure on the central bank.

We will get the first glimpse of European inflation in January when we get data for Germany and Spain on Friday. We expect euro area inflation to decline to 1.7% y/y due to lower energy prices compared to last year, but the ECB is looking at core inflation which is likely to remain unchanged. However, there is always much uncertainty in January and this time, there are both VAT cuts (on restaurants in Germany) and increases (on hotels in the Netherlands). In addition, energy prices have recently been increasing again, as cold weather and rather small gas stocks are putting pressure on prices.

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