Complex geopolitical backdrop shapes market tone as Gold teases $5000

EU mid-market update: Complex geopolitical backdrop shapes market tone as gold teases $5000, silver approaches $100 and Yen saw two big figure move; Focus shifts back to fundamentals and earnings as Davos comes to a close.

Notes/observations

- European equity markets open mostly lower after yesterday’s relief rally tied to Pres Trump’s reversal of Greenland-related tariffs. Sentiment remains fragile as EU officials, still irritated by the episode, signal that ratification of a US trade agreement may now face a more cautious path. Europe’s top systemic risk watchdog again warned this week that geopolitical fragmentation is now a material market risk.

- For flash PMIs, Germany surprised positively with services strength and beat in manufacturing, lifting Bund yields. France disappointed, with services miss being the 1st contraction in 3 months. Euro (EUR) initially hit by weak French PMI but later partially recovered on stronger German data. Strong UK manufacturing and services put additional tailwinds into GBP.

- Further on data, UK retail sales beat expectations across multiple measures. Sterling (GBP) trimmed losses after the release. Bulls see signs of a gradual consumer recovery as policy uncertainty eases, inflation falls, and expected BoE cuts provide support but bears arguing case of fading momentum as Q4 retail volumes still fell 0.3%, online sales strength was narrow, and softer wage growth + weak confidence limit upside for 2026.

- US, Russia, and Ukraine prepare for first three-way talks in Abu Dhabi since 2022. Diplomatic tensions persist over Trump’s attempted tariff threat against France (champagne), even after he walked back the measure. NATO continues negotiations over Greenland-linked security cooperation. In the Middle East, monitoring rising US-Iran tensions; Trump claims an “armada” is moving toward the region.

- Note on the Japanese yen: BOJ held rates as expected, with one dissenter to hike rates. A while after the decision, USD/JPY swung violently from ~159.3 to ~157.4 due to strength in yen. Traders pointed to ‘potential intervention’ or more likely a ‘price check’ (which precedes actual intervention). Japan officials have built up verbal pressure in recent days about price action. Ueda said he is watching the yen “carefully” and stands ready to restore bond-market order if yields behave abnormally. BOJ futures fully pricing rate hike by June 2026 for the 1st time.

- Prediction markets have priced in a paralyzed capital, assigning a 53% implied probability to snow accumulations exceeding 15 inches in Washington, compared with a consensus of 8-10 inches for New York. With the Arctic system imperiling 175M Americans, the data suggests that by Sunday morning, the nation's travel infrastructure will face a total liquidity freeze.

- Asia closed higher with KOSPI outperforming +0.8%. EU indices -0.1% to -0.5. US futures -0.2% to -0.4%. Gold -0.4%, DXY +0.1%; Commodity: Brent +1.1%, WTI +1.2%; Crypto: BTC -1.2%, ETH -2.8%.

Asia

- Bank of Japan (BOJ) left Target Rate unchanged at 0.75% (as expected). Vote to keep policy steady was not unanimous (8-1). Takata dissented for a 25bps hike). Statement reiterated stance to keep raising rates if economy, price outlook was realized).

- BOJ Quarterly Outlook for Economic Activity and Prices (aka Staff Projections).

- Japan Dec National CPI Y/Y: 2.1% v 2.2%e; CPI (ex-fresh food) Y/Y: 2.4% v 2.4%e.

- Japan Jan Preliminary PMI Manufacturing: 51.5 v 50.0 prior 1st expansion in 7 months); PMI Services: 53.4 v 51.6 prior.

- Australia Jan Preliminary PMI Manufacturing: 52.4 v 51.6 prior [3rd month of expansion]; PMI Services: 56.0 v 51.1 prior.

- South Korea Jan Consumer Confidence: 110.8 v 109.8 prior.

- New Zealand Q4 CPI Q/Q: 0.6% v 0.5%e; Y/Y: 3.1% v 3.0%e.

- Japan Lower House dissolved (as expected) ahead of Feb 8th snap election.

- PBOC Gov said to signal further interest rate and RRR cuts.

- China govt to set lower GDP growth target for 2026 to between 4.5-5.0% (**Note: in-line with expectations).

Global conflict/tensions

- Nato Sec Gen Rutte and Trump said to have discussed revamp of the US-Denmark military deal.

- US said to be pushing Russia and Ukraine towards direct talks in Abu Dhabi. A trilateral meeting is expected to occur on Friday (technical teams only).

Europe

- EU Parliament expected to vote on ratifying the bloc’s trade deal with the US after President Trump walked back his latest threat to impose tariffs.

Americas

- Trump stated that had finished interviewing candidates for Fed chair and has someone “very respected” in mind for the role.

- Government funding package on track to pass the House.

- House defeated resolution that would have limited Pres Trump's war powers.

Energy

- Venezuela’s national assembly said to have backed a new hydrocarbons law that would open up the socialist country’s oil sector to private companies.

Speakers/fixed income/FX/commodities/erratum

Equities

Indices [Stoxx600 -0.24% at 607.40, FTSE -0.07% at #, DAX -0.18% at 24,830.91, CAC-40 -0.41% at 8,115.35, IBEX-35 -0.35% at 17,601.64, FTSE MIB -0.49% at 44,869.50, SMI -0.60% at 13,165.40, S&P 500 Futures -0.23%].

Market Focal Points/Key Themes: European indices opened mostly lower and remained under pressure through the early part of the session; geopolitical situation still weighing on sentiment as EU-US trade deal faces ratification challenges; among better performing sectors are telecom and energy; sectors leading to the downside include financials and consumer discretionary; earnings expected in the upcoming Americas session include Booz Allen and SLB.

Equities

- Consumer discretionary: Adidas [ADS.DE] -4.0% (analyst downgrade).

- Industrials: BASF [BAS.DE] -1.5% (prelim results), Babcock International [BAB.UK] -2.0% (trading update), Schaeffler [SHA.DE] +6.0% (analyst upgrade), Gurit Holdings [GUR.CH] +9.5% (earnings).

- Technology: ASML [ASML.NL] -2.5% (Intel results and Capex outlook).

- Telecom: Ericsson [ERICB.SE] +9.5% (earnings; outlook).

Speakers

- BOE’s Greene: Due to spillovers, there can be a case for BoE doing opposite of Fed in cases of divergence. A looser Fed policy stance in 2026 would push up on UK inflation. More risk of slowing disinflation than weaker demand.

- BOJ Gov Ueda post rate decision press conference reiterated stance that overall assessment that domestic economy was recovering moderately, albeit with some weakness. To work closely with govt on long-term rates and to coordinate with govt on bond market. Reiterated stance that would not comment on FX levels but watching markets closely.

- Japan Fin Min Katayama declined to comment on if Japan intervened into FX; reiterated stance of watching FX with sense of urgency.

Currencies/fixed income

- Price action in USD/JPY was volatile as FX intervention fears were elevated. The pair was edging towards the key psychological 160 level when a vacuum of price action was demonstrated. Yen strengthened to test 157.40 before dealers confirmed that BOJ did not perform any price check or actual intervention. Verbal intervention had been ramped up in prior weeks so market on the lookout for any solo or coordinated FX intervention. BOJ futures fully pricing a 25bps rate hike by June 2026 for the 1st time. Pair at 158.00 by mid-session.

- Key psychological in precious levels were also approached yet not breached. Spot gold probed the $5,000/oz area while silver approached the $100/oz.

- EUR/USD at 1.1740 area. Various EU PMI readings were mixed and continued to highlight the fragile recovery in the region.

- GBP/USD tested 2.5 week highs in the aftermath of better UK retail sales and PMI data in the session.

- 10-year German Bund yield last at 2.89%, France 10-year Oat at 3.50% and 10-year Gilt yield at 4.46% 10-year Treasury yield: 4.23%; 10-year JGB: 2.24%.

Economic data

- (UK) Dec Retail Sales (ex-auto/fuel) M/M: 0.3% v 0.0%e; Y/Y: 3.1% v 1.7%e.

- (UK) Dec; Retail Sales M/M: 0.4% v 0.0%e; Y/Y: 2.5% v 1.1%e.

- (SE) Sweden Dec Unemployment Rate: 8.3% v 8.2% prior; Unemployment Rate (seasonally adj): 8.8% v 8.8%e.

- (HU) Hungary Dec Unemployment Rate: 4.4% v 4.4%e.

- (HU) Hungary Nov Average Gross Wages Y/Y: 8.9% v 8.6%e.

- 02:30 (CN) Weekly Shanghai Copper Inventories (SHFE): K v 213.5K tons prior.

- (TH) Thailand May Foreign Reserves w/e Jan 16th: $284.1B v $283.3B prior.

- (FR) France Jan Business Confidence: 99 v 99e; Manufacturing Confidence: 105 v 101e; Production Outlook Indicator: -4 v -7e; Own-Company Production Outlook:17 v 9e.

- (TW) Taiwan Dec Industrial Production Y/Y: 21.6% v 12.0%e.

- (RU) Russia Narrow Money Supply w/e Jan 2nd (RUB): 19.65T v 19.83T prior.

- (FR) France Jan Preliminary Manufacturing PMI: 51.0 v 50.5 (2nd month of expansion); Services PMI: 47.9 v 50.3e; Composite PMI: # v 50.0e.

- (TW) Taiwan Dec M2 Money Supply Y/Y: 5.0% v 5.1% prior; M1 Money Supply Y/Y: 4.9% v 4.9% prior.

- (DE) Germany Jan Preliminary Manufacturing PMI: 48.7 v 47.8e (43rd month of contraction); Services PMI: 53.3 v 52.5e; Composite PMI: 52.5 v 51.7e.

- (EU) Euro Zone Jan Preliminary Manufacturing PMI: 49.4 v 49.2e (3rd month of contraction); Services PMI: 51.9 v 52.6e; Composite PMI: 51.5 v 51.9e.

- (UK) Jan Preliminary Manufacturing PMI: 51.6 v 50.6e (3rd month of expansion); Services PMI: 54.3 v 51.7e; Composite PMI: 53.9 v 51.5e.

Fixed income issuance

- (IN) India sold INR330B vs,. INR330B indicated in 2029, 2033 and 2055 bonds.

- (ZA) South Africa sold total ZAR1.0B vs. ZAR1.0B indicated in 2031, 2038 and 2050 I/L bonds.

Looking ahead

- 05:25 (EU) Daily ECB Liquidity Stats.

- 06:00 (UK) DMO to sell £4.5B in 1-month, 3-month and 6-month bills .

- 06:30 (IN) India Forex Reserve w/e Jan 16th: No est v $687.2B prior.

- 07:00 (MX) Mexico Nov IGEA Economic Activity Index (Monthly GDP) M/M: 0.1%e v 1.0% prior; Y/Y: 1.1%e v 1.8% prior.

- 07:00 (CL) Chile Dec PPI M/M: No est v -0.8% prior.

- 08:00 (RU) Russia Nov Trade Balance: No est v $11.1B prior; Exports: No est v $36.1B prior; Imports: No est v $25.0B prior.

- 08:00 (UK) Daily Baltic Dry Bulk Index- 08:00 (ES) Spain Debt Agency (Tesoro) announcement on upcoming issuance.

- 08:00 (IN) India announces upcoming bill issuance (held on Wed).

- 08:30 (CA) Canada Nov Retail Sales M/M: +1.2%e v -0.2% prior; Retail Sales (ex-auto) M/M: +1.0%e v -0.6% prior.

- 08:30 (US) Weekly USDA Net Export Sales.

- 09:45 (US) Jan Preliminary S&P Manufacturing PMI: 52.0e v 51.8 prior; Services PMI: 52.9e v 52.5 prior; Composite PMI: 52.9e v 52.7 prior.

- 10:00 (US) Jan Final University of Michigan Confidence: 54.0e v 54.0 prelim.

- 10:00 (US) Nov Leading Index: -0.2%e (**Note: Both Nov & Oct data to be released).

- 10:00 (CO) Colombia Nov Economic Activity Index (Monthly GDP) Y/Y: No est v 3.0% prior.

- 10:00 (CO) Colombia Nov Manufacturing Production Y/Y: 1.9%e v 1.9% prior; Industrial Production Y/Y: 2.0%e v 1.1% prior.

- 10:00 (CO) Colombia Nov Retail Sales Y/Y: 8.2%e v 10.0% prior.

- 11:00 (US) Jan Kansas City Fed Services Activity: 3e v 3 prior.

- 11:00 (EU) Potential sovereign ratings after European close (Fitch on Finland; DBRS on Belgium; Scope on Ireland).

- 13:00 (US) Weekly Baker Hughes Rig Count data.

- 14:00 (AR) Argentina Nov Wages M/M: No est v 2.5% prior.