Weekly focus – Walking on thin ice

Favourable macro environment continues to support broader risk appetite despite the fragile geopolitical outlook. Both realized and implied volatility across equities, FX and commodities remain modest in historical context. In Europe, main equity indices have continued their steady increases while cyclical currencies like SEK and NOK have strengthened vis-à-vis EUR. Notably, the broad USD has also had a strong start to the year, though we do not expect this to last.

Donald Trump reportedly backtracked his plans for striking Iran this week, citing declining risks of large-scale killing following several weeks of protests. Limited news sources have indicated that the protests could be abating, though the full picture of the current situation remains opaque after broad internet blackouts.

The meeting between officials from Denmark, Greenland and the US ended without drama, but also without resolutions. Danish PM Mette Frederiksen said that a 'fundamental disagreement' remains over the future of Greenland. NATO allies from Germany, France, Sweden and Norway have committed to sending military staff for drills in Greenland later in the year.

Incoming macro data has remained generally positive. From the US, first regional January manufacturing indices from NY and Philadelphia surprised to the topside, and weekly jobless claims declined. December CPI landed close to expectations in headline terms (+0.3% m/m SA & 2.7% y/y) but slightly below consensus in core terms (+0.2% m/m SA & 2.6% y/y). The downside miss was largely driven by flat core goods prices, while services and food prices rose from prior month. That said, the Fed remains aware that shutdown-driven delays to previous data collection might have distorted the inflation picture, see more from Global Inflation Watch, 13 January.

Government bond yields have remained relatively steady on both sides of the Atlantic. We expect US yield curve to steepen this year, as rising term premium lifts the long end, even if the Fed continues cutting policy rates. In the euro area, macro momentum remains positive, but markets inflation expectations have declined below 2% for the next few years. We forecast no changes to the ECB's policy rate in 2026 or 2027 and expect also the long-end rates to remain close to current levels. Note that we continue to expect no independent policy rate changes from the Danmarks Nationalbank, see Yield Outlook, 15 January.

Next week will be relatively light in terms of macro data. January flash PMIs are due for release for both Euro area, the UK and the US on Friday. We think modest growth momentum has continued at the beginning of the year and expect the indices to land close to December levels. We forecast Chinese Q4 GDP at 4.5% y/y on Monday, which would bring the annual 2025 growth close to the 5% target. UK December Jobs and CPI data will be released on Tuesday and Wednesday, respectively.

We do not expect the Bank of Japan to make policy rate changes early Friday morning after the December hike. Markets do not price in any possibility for a policy rate move. Japanese PM Sanae Takaichi could formally announce a snap election next week, with tentative election date set for 8 February.

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