Removing near-term tariff tail risk is one thing, securing a lasting deal is another
|Markets
The much-anticipated visit at the World Economic Forum in Davos by US President Trump defused the Greenland crisis. During his keynote address, risk sentiment turned less sour after excluding the tail risk of using military force to obtain the “giant piece of ice”. Instead he floated the short term prospect of immediate talks on acquiring Greenland. After European close and following several bilateral meetings including with head of NATO, Rutte, Trump turned to social media announcing a framework for a future deal on Greenland (and the broader arctic region). He dropped the February 1st tariff treat (10%) against eight EU nations and also touted that the US would be involved in Greenland’s mineral rights. The US storyline so far hasn’t been really confirmed/challenged from the European side, though the Danish foreign minister said that the day ended better than the way it started. Financial markets in any case didn’t wait to get the specifics on what has been agreed upon or how the road forward towards a deal exactly looks like. European stock markets erased losses after the WEF speech to close near unchanged. US stock markets grabbed more momentum thanks to social media details, closing up to 1.2% higher. FI and FX markets also retraced on Tuesday’s sell America move. US Treasuries outperformed German Bunds in a bull flattening move that sends the long end of the curve up to 6 bps lower. The German Bund curve still closed in bear steepening fashion (long end up to 3.5 bps higher). Higher energy prices (both oil, but especially gas) because of expected cold winter weather against the background of relatively low inventories are probably also at play. EUR/USD closed at 1.1685 from a start at 1.1725. Apart from the Greenland pivot, markets also welcomed the outcome of the US Supreme Court hearing on Trump’s attempt to fire Fed governor Cook for cause. Most judges side with lower court rulings that the administration is overstepping its authority and thereby risks weakening if not shattering the independence of the US central bank. The court is set to rule on the issue in July.
Asian stock market join the risk rally this morning with only China (flat) underperforming. The very long end of the Japanese yield curve for a second consecutive session shows signs of “stabilization” with the 30-yr yield down 5.4 bps. To put things in perspective: we haven’t returned to last Friday’s closing levels following the nasty JGB sell-off on Monday and Tuesday. Today’s eco calendar contains weekly jobless claims and (outdated & distorted) November PCE deflators and spending/income data. The ECB published minutes of its December meeting. These data/events will play second fiddle with markets looking for more clues next steps or details about the Greenland framework. The removal of the short term (tariff-escalated) tail risk is one thing, but reaching a sustained deal is still something different. US officials (Witkoff & Kushner) will travel to Russia for talks with Russian president Putin on the latest proposals on a peace plan and serve as a wildcard for trading.
News and views
The Australian Bureau of Statistics this morning published strong/stronger than expected December labour market data. The unemployment rate dropped to 4.1% from 4.3%. The number of employed people rose by 65.2k (after a 28.7k decline in the previous month), mostly driven by higher full employment. The participation rate increased from 66.6% to 66.7, mainly due to young people (15-24-y) moving into employment. The strong labour market data are adding to market expectations that the Reserve Bank of Australia might lift its policy rate already as soon as the February 03 meeting (60% discounted). Other recent data pointed to decent domestic demand with markets looking for final clues in the quarterly CPI report to be released next Wednesday. The Australian 3-y government bond yield this morning rose 6.5 bp to 4.24%. The Aussie dollar jumped higher to test the AUD/USD 0.68 barrier, trading at the strongest levels since October 2024.
The Hungarian government yesterday was reported to set up measures worth HUF 100bn (€260mn) to support the restaurant industry, including liquidity support for the sector, halving a tourism tax and allowing them to treat part of their revenue as a service fee, reducing their tax bills. Separately, Hungarian Prime Minster Orban on social media also announced that he will take extra measures to help households coping with higher energy bills in January because of cold weather. The announcement comes as the government faces a fierce political battle in the run-up to parliamentary elections to be held in April.
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