European markets decline as they await Trump speech

European markets are losing ground once again today, in a day that will undoubtably be focused on Donald Trump’s appearance in Davos, with politicians and markets anxiously awaiting a speech that could go down in history. Russian claims that previous discussions with Trump centred around leaving Russia to dominate their own interests does highlight the fact that the President is happy to see the emergence of Russia as an emerging force in Europe. The plan to gradually withdraw US armed forced from European locations further highlights the fact that the US President seems more interested in shifting the deck of cards in favour of Russia and away from their historical partners in Europe. With Trumps so-called ‘board of peace’ currently looking like a who’s who of anti-EU leaders, there will be a great degree of trepidation for long-standing allies of the US when the President takes to the stage. With the US looking to rip up the status quo, it has left the Nato nations scrambling for a new pathway forward, which appears likely to play into the hands of China given comments from Carney and Macron yesterday. This could explain why we have seen mainland Chinese and Hong Kong stocks on the rise overnight. 

This morning saw fresh inflation data out of the UK, with any optimism over a prospective rate cut from the Bank of England cooling thanks to a 3.4% headline CPI metric for the month of December. This was primarily driven by alcohol and tobacco (5.2% vs. 4.0% in November) and transport (4.0% vs. 3.7%). Meanwhile, food inflation rose from 4.2% to 4.5%, providing continued caution given how important this particular segment is for the everyday consumer. Overall, this provides little grounds for a February rate cut, but the pathway lower for UK inflation does still remain intact. It looks likely base effects drive down CPI in a meaningful manner in the months ahead, with the 2% target a distinct possibility by April/May. 

In a week that has being dominated by concerns over Greenland and the breakdown in relations between the US and Europe, many have overlooked the worrying developments seem within the Japanese bond market. Yesterday saw the Japanese 30-year spike to a record high of 3.90% yesterday, raising concerns over the repatriation of capital that has been allocated across global markets owing to the cheap borrowing costs in Japan. With a Prime Minister that has called a snap election to bolster support for her plans for lower taxes and higher spending, the most indebted developed country in the world looks set to go further into the red as borrowing costs rise. This all provides a significant risk for global stability in the financial markets, and the incessant rise in Japanese bond yields provides yet another reason why gold continues to hit record highs on a daily basis.