Risk sentiment stabilizes, as elections in Japan weigh on the Yen and earnings and CPI come into focus

Risk sentiment is back on. After initially falling sharply on Monday, the S&P 500 closed at a record high, suggesting that investor sentiment is not only resilient to geopolitics, but also to domestic concerns triggered by an interventionist President Trump. A robust defense of Fed chair Powell from previous governors and from Republican members of Congress has helped to stabilize risk sentiment in the last 24 hours, even President Trump has figured out that you can only push the Fed so far, and has distanced himself from the subpoenas issued to Jerome Powell by the Department of Justice.

Buyers remain in control and resilient to external and internal threats

The price action in equity markets in the last 24 hours suggests that buying interest remains robust, and investors are unwilling to give up on risk and the ‘buy America’ trade. The ‘Sell America’ trade lasted all of 12 hours, suggesting that 1, investors are willing to look through Donald Trump’s antics at home or abroad, and 2, the fundamentals are what matter, and stocks won’t just be sold on the back of political noise, especially as we wait for crucial earnings data and key economic data releases.

Stock gains modest in Europe as we wait for key economic and earnings data

For financial markets, this means that a potential roadblock to the rally in risk assets that we have seen since the start of the year has been removed. There is a sense of calm in financial markets, although stock market gains in Europe are modest so far, and US stock index futures are pointing to a mild loss at the open. Globally, bond yields are higher, although gains for sovereign bond yields are small so far on Tuesday. The gold price is also posting a small loss, which is a sign that risk sentiment is improving, although gold remains close to the record highs above $4,600. We expect the gold price to remain elevated for some time, as investors continue to seek diversification assets as global risk levels rise.

Japan’s PM expected to call election, sends stocks flying

The main drivers for markets on Tuesday include reports that Japan’s new Prime Minister could call a snap election, and news that Donald Trump will impose 25% tariffs on countries that are doing business with Iran. Japanese election risks have pushed the Nikkei sharply higher, it rose by more than 3% on Tuesday led by the tech sector, which pushed the Japanese index to a record high. The Nikkei is the top performing major global index so far this year. Investors are making the assumption that Takaichi will only call an election that she expects to win. She is hawkish on foreign policy and has pro-stimulus plans for the economy, which are attracting investors. This is weakening the yen, which is the weakest currency in the G10 FX space and is lower by 0.5% vs. the USD. USD/JPY is testing the highs from 2024 at 159.00, and this is giving Japanese exporters a boost.

Trump tariff threat on Iran keeps Oil price supported

The oil price is higher after Donald Trump’s attempts to weaken the Iranian regime in the face of mass protests throughout the country. China is the largest purchaser of Iranian oil, so if it tries to avoid Iranian oil to adhere by the US’s rules then it could cause a supply issue for the oil market. Brent crude is higher by 0.6% so far today, and is trading at $64.30. The geopolitical situation in Iran and Venezuela may not be impacting stock markets, but it has had a major impact on the price of oil. Brent crude is higher by 5% so far this year, outpacing most stock indices.

UK economic woes to continue if consumer weakens further

The oil price is supporting the  FTSE 100 today and energy is leading the index. There was weak news on retail sales over the Christmas period. The BRC reported that sales slowed for the fourth consecutive month, which suggests that the UK economy is on the brink of recession. This has had an impact on financial markets, and the UK’s consumer discretionary sector is one of the weakest sectors on the UK index today, and Next is one of the weakest stocks on the FTSE 100 so far today.

CPI and Earnings data to fuel markets, as the Trump effect fades

It will be worth watching price action closely over the coming days. Later today, Q4 earnings season will kick off with JP Morgan and Delta. We also get US CPI. This is by far the most important metric for the Fed, and more important than the President or the DOJ. Prior months’ inflation data was distorted by the government shutdown, so the December data is expected to be the ‘cleanest’ data we have received for months and could give us a clear idea about the trend for US price growth. Thus, today’s data is expected to reset inflation expectations and be a clear indicator of what the Fed should do this year and how many rate cuts to expect. Ahead of the CPI report, the interest rate futures market is expecting 2 rate cuts from the Fed this year, which is down from 2.5 cuts expected before the Trump/ Powell feud escalated.

The market could be sensitive to this data, especially if there is a large positive or negative surprise. The market is expecting a reading of 2.7% for headline CPI. Finally, macro data including earnings and CPI could take the focus away from geopolitics.