Trump's tariff roulette triggers quite soft China retaliation but makes Diageo withdraw its outlook

Notes/observations

- European markets started lower, reflecting concerns over escalating trade tensions. Asian markets showed gains, while US futures weakened after a lower close. Bond yields rose, with the US 10-year up 4 bps at 4.57%. The dollar strengthened, oil prices dipped, and gold softened despite tariff-induced safe-haven buying. Industrial metals saw an uptick, and Bitcoin rebounded.

- Trade dynamics are volatile with Trump pausing tariffs on Canada and Mexico for 30 days, but rumors circulate about potential 10% tariffs on EU imports. China responded to US tariffs with retaliatory measures on energy products, sparking fears of an extended trade conflict, though there's optimism for a negotiated resolution.

- French PM Bayrou faces confidence votes after budget adjustments, and the UK is bracing for fiscal constraints ahead of a major spending review.

- Sterling (GBP) weakened to $1.24 due to tariff uncertainties, with markets anticipating at least three BoE rate cuts this year, a 98% chance of a rate cut to 4.50% this Thursday. Euro (EUR) remains near three-week lows at $1.03, pressured by ECB's dovish outlook and ongoing trade disputes.

- European natural gas prices retreated from highs due to redirected US LNG following China's tariffs, amidst concerns over Europe's gas storage levels.

- Market focus looks ahead to JOLTS job openings, factory orders and durable goods out of US at 10:00 ET, as well as any fresh developments for tariffs and trade.

- Asia closed mixed with Hang Seng outperforming +2.8%. EU indices -0.2% to +0.4%. US futures -0.1% to -0.3%. Gold +0.1%, DXY +0.1%; Commodity: Brent -1.0%, WTI -1.7%; Crypto: BTC +3.6%, ETH +5.7%.

Asia

- China to levy counter measures on some US imported products with 15% tariffs on coal and LNG; 10% tariff on oil, agricultural machines from the US (**Note: 10% tariff on Chinese goods took effect on Tues, Feb 4th at 00;00 ET (05:00GMT).

- New Zealand Dec Building Permits M/M: -5.6% v +4.9% prior.

- Australia Dec Household Spending M/M: 0.4% v 0.3%e; Y/Y: 4.3% v 3.4%e.

- BOJ Gov Ueda reiterated aiming for sustainable and stable 2.0% inflation.

Europe

- France Socialist Party leadership to not back a no-confidence vote against current govt (as speculated); **Note: Move implied that PM Bayrou could hope to survive a no confidence vote.

- Ireland Jan PMI Manufacturing: 51.3 v 49.1 prior.

Americas

- Canada PM Trudeau noted that it had attained 30-day reprieve on US tariffs following call with President Trump; To name a fentanyl czar.

- Mexico President Sheinbaum stated that US tariffs on Mexico were paused for a month following a call with President Trump. Mexico to “immediately” send soldiers to the border.

- President Trump signed an executive order on Monday directing the creation of a US sovereign wealth fund within the next year.

- Fed's Goolsbee (voter) noted that uncertainties likely meant Fed needed to be a little more careful; There was risk that inflation could tick back up.

- Fed's Bostic (hawk, non-voter) noted that current degree of uncertainty had broadened considerably. Maintained end-2024 solid outlook while monitoring the economy; Emphasis remains on inflation.

- Fed's Collins (voter) noted that a lot of uncertainty how policies would unfold; Fed would try to look through a one-time price level [due to tariffs]; No urgency to change rates now.

Energy

- OPEC+ members affirmed its commitment to production cuts to ensure price stability of oil market at joint ministerial monitoring committee (JMMC) meeting; Next JMMC meeting to be April 5th.

Speakers/fixed income/FX/commodities/erratum

Equities

Indices [Stoxx600 -0.23% at 533.62, FTSE -0.23% at 8,563.98, DAX +0.01% at 21,408.25, CAC-40 +0.08% at 7,861.14, IBEX-35 +0.42% at 12,258.86, FTSE MIB -0.25% at 36,127.00, SMI -0.56% at 12,465.50, S&P 500 Futures -0.24%].

Market focal points/key themes: European indices open generally higher but quickly turned around to trade mostly in the red through the early part of the session; better performing sectors include technology and materials; while consumer discretionary and industrials among sectors pulling lower; Nordic Waterproofing to be acquired by Kingspan; SofwareOne to lift on Oslo Bors as part of combination with Crayon; focus on release of US durable goods orders later in the day; earnings expected in the upcoming Americas session include PayPal, Alphabet, AMD, and Ferrari.

Equities

- Consumer staples: Diageo [DGE.UK] -3.5% (H1 results, withdraws mid-term outlook; notes concern over tariff impact).

- Financials: UBS [UBSG.UK] -3.0% (Q4 results, above estimates, $3.0B buyback, raised dividend; conf call comments), BNP Paribas [BNP.FR] +2.5% (Q4 results, above estimates, €1.1B buyback; French budget saga), Crest Nicholson [CRST.UK] -3.5% (FY24 results, cautious outlook), Raiffeisen Bank [RBI.AT] +2.5% (Q4 results).

- Industrials: Maersk [MAERSKB.DK] -1.0% (Liberian-flagged crude oil tanker Chrysalis, which was attacked by Yemen's Houthis last year, sailed through the Red Sea this week), Airbus [AIR.FR] -0.5% (said to retain Goldman Sachs to help form European space consortium comprised of Airbus space & satellite with Leonardo and Thales; Would be step to rival SpaceX), Rheinmetall [RHM.DE] -3.0% (Trump said made a lot of progress on Russia and Ukraine) - Technology: Infineon [IFX.DE] +9.5% (Q1 results, above estimates, Q2 outlook strong), Dassault Systems [DSY.FR] +0.5% (Q4 results), Siltronic [WAF.DE] -11.5% (prelim Q4 results, initial FY25 guidance weak, pushes back 2028 targets) - Telecom: Nokia [NOKIA.FI] +0.5% (multi-year expansion deal to upgrade AT&T's voice carriage and 5G network automation in the U.S.), Publicis [PUB.FR] +0.5% (earnings), Vodafone [VOD.UK] -6.0% (Q3 trading update, starts €480M share buyback).

Speakers

- Sweden Central Bank (Riksbank) Jan Minutes noted policy rate had probably been lowered sufficiently. Monetary policy now aimed to support the economic recovery and simultaneously ensure that inflation remained low and stable. Continually monitoring and evaluating how new information affects the economic outlook.

- EU Trade Commissioner Sefcovic stated that believed EU could resolve trade issues with US via talks.

- Turkey Fin Min Simsek reiterated stance that the govt top priority was to bring down inflation. Saw some downside risk to growth in the short term.

- Bank of Korea (BOK) Jan Minutes saw one member note that a rate cut could increase FX volatility. One member noted that policy must be flexible and astute going forward. One member noted that Board should be open to a rate cut in the next three months.

- Japan Chief Cabinet Sec Hayashi stated that PM Ishiba to meet US Pres Trump during Feb 6-8th US visit.

Currencies/fixed income

- Trade factors continued to be the focus for FX price action. USD was softer after President Trump agreed to postpone the tariffs on Mexico and Canada for a month after talks with the leaders of both countries. The greenback saw some strength return as China announced its retaliation for the 10% tariffs impost by the US. Dealers noted that Beijing's measures only targeted some U.S. products, whereas the US tariffs applied to all Chinese exports to the country providing some hope of de-escalation at some point. Theme at this time ebbed the risk aversion sentiment as restraint in China's response to US tariffs coupled with a Trump signal a desire to talk with President Xi soon.

- EUR/USD regained all of its late Asian losses to trade around 1.0350 by mid-session.

- GBP/USD rebounded at test 1.2435 with focus on the upcoming BOE rate decision on Thurs. UK continued to see some inflation relief as Kantar showed annual grocery price inflation was 3.3% in the four weeks to 26-Jan, down from 3.7% last month.

- USD/JPY back above the 155 level.

- EU bond yields were higher by approx. 3bps in both the core and periphery as markets assessed the Chinese tariff announcement. President Trump planned to speak with President Xi soon, raising possibility of a potential reprieve on 10% tariff after he postponed levies on Canada and Mexico. Trump also warned tariffs will be substantial if a deal cannot be made. 10-year Gilt at 4.543% while the 10-year Bond yield at 3.53%. The 10-year French/German Gov't bond spread at approx. +73bps aided by France Socialist Party leadership announcement to not back a no-confidence vote against current govt.

Economic data

- (FR) France Dec YTD Budget Balance: -€156.3B v -€172.5B prior.

- (ES) Spain Jan Net Unemployment Change: +55.0K v -25.3K prior; Net Employment Change: +35.8K v +46.8K prior.

Fixed income issuance

- (ID) Indonesia sold total IDR28.0T vs. IDR26.0T indicated in bills and bonds.

- (ZA) South Africa sold total ZAR3.75B vs. ZAR3.75B indicated in 2032, 2037 and 2048 bonds.

- (ES) Spain Debt Agency (Tesoro) sold total €5.82B vs. €5.5-6.5B indicated range in 6-month and 12-month bills.

- (UK) DMO sold £4.25B in 4.375% Mar 2030 Gilts; Avg Yield: 4.276% v 4.490% prior; bid-to-cover: 3.10x v 3.00x prior; Tail: 0.5bps v 0.5bps prior.

- (AT) Austria Debt Agency (AFFA) sold total €1.725B vs. €1.725B indicated in 2030 and 2039 RAGB bonds.

Looking ahead

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

- 05:15 (CH) Switzerland to sell 6-month Bills.

- 05:30 (HU) Hungary Debt Agency (AKK) to sell 3-Month Bills.

- 05:30 (BE) Belgium Debt Agency (BDA) to sell combined €2.4B in 3-month, 6-month and 12-month bills.

- 05:30 (EU) ECB allotment in 7-Day Main Refinancing Tender (MRO) (prior €11.859B with 45 bids recd).

- 06:30 (TR) Turkey Jan Real Effective Exchange Rate (REER): No est v 67.12 prior.

- 06:30 (EU) ESM to sell €1.1B in 3-month Bills.

- 07:00 (RU) Russia announcement on upcoming OFZ bond issuance (held on Wed).

- 08:00 (UK) Daily Baltic Dry Bulk Index.

- 08:30 (FR) ECB’s Villeroy (France).

- 08:55 (US) Weekly Redbook LFL Sales data.

- 09:00 (MX) Mexico Jan Manufacturing PMI: No est v 49.8 prior.

- 10:00 (US) Dec JOLTS Job Openings: 8.000Me v 8.098M prior.

- 10:00 (US) Dec Factory Orders: -0.7%e v -0.4% prior; Factory Orders (ex-transportation): No est v 0.2% prior.

- 10:00 (US) Dec Final Durable Goods Orders: -2.2%e v -2.2% prelim; Durables (Ex-transportation): 0.3%e v 0.3% prelim; Capital Goods Orders (non-defense/ex-aircraft): No est v 0.5% prelim; Capital Goods Shipments (non-defense/ex-aircraft): No est v 0.6% prelim.

- 10:00 (MX) Mexico Dec Total Remittances: $5.7Be v $5.4B prior.

- 10:00 (MX) Mexico Central Bank Economists Survey.

- 10:00 (CO) Colombia Dec Exports: $4.2Be v $4.1B prior.

- 11:00 (DK) Denmark Jan Foreign Reserves (DKK): No est v 634B prior.

- 11:00 (US) Fed’s Bostic.

- 13:00 (US) Treasury to sell 3-Year Notes.

- 13:00 (MX) Mexico Jan IMEF Manufacturing Index: No est v 47.7 prior; Non-Manufacturing Index: No est v 49.6 prior.

- 14:00 (US) Fed’s Daly.

- 16:00 (KR) South Korea Jan Foreign Reserves: No est v $415.6B prior.

- 16:30 (US) Weekly API Oil Inventories.

- 16:45 (NZ) New Zealand Q4 Unemployment Rate: 5.1%e v 4.8% prior.

- 16:45 (NZ) New Zealand Q4 Employment Change Q/Q: -0.2%e v -0.5% prior; Y/Y: -0.9%e v -0.4% prior; Participation Rate: 71.1%e v 71.2% prior.

- 17:00 (AU) Australia Jan Final PMI Services: No est v 50.4 prelim; Composite PMI: No est v 50.3 prelim.

- 18:00 (KR) South Korea Jan CPI M/M: 0.5%e v 0.4% prior; Y/Y: 2.1%e v 1.9% prior; CPI (ex-food/energy) Y/Y: 1.8%e v 1.8% prior.

- 18:30 (JP) Japan Dec Labor Cash Earnings Y/Y: 3.6%e v 3.9% prior (revised from 3.0%); Real Cash Earnings Y/Y: -0.1%e v +0.5% prior (revised from -0.3%); Cash Earnings (same sample base) Y/Y: 3.6 v 3.7% prior (revised from 3.5%); Scheduled Full-Time Pay (same sample base) Y/Y: 2.8%e v 2.7% prior (revised from 2.8%).

- 19:00 (NZ) New Zealand Jan ANZ Commodity Price Index M/M: No est v 0.2% prior.

- 19:30 (JP) Japan Jan Final PMI Services: No est v 52.7 prelim; PMI Composite: No est v 51.1 prelim.

- 19:30 (HK) Hong Kong Jan PMI (whole economy): No est v 51.1 prior.

- 19:30 (SG) Singapore Jan PMI (whole economy): No est v 51.5 prior.

- 19:30 (US) Fed’s Jefferson.

- 20:00 (PH) Philippines Jan CPI M/M: 0.3%e v 0.6% prior; Y/Y: 2.8%e v 2.9% prior.

- 20:45 (CN) China Jan Caixin PMI Services: 52.4e v 52.2 prior; PMI Composite: No est v 51.4 prior.

- 23:00 (ID) Indonesia Q4 GDP Q/Q: 0.5%e v 1.5% prior; Y/Y: 4.9%e v 5.0% prior; Overall 2024 Annual GDP Y/Y: 5.0%e v 5.1% prior.