Risk appetite tested as tariffs rhetoric intensifies 

Trump restarts the tariffs war 

The tariff rhetoric picked up pace over the weekend, as US President Trump temporarily set aside his Ukraine-Russia peace plan to refocus on implementing his “America First” agenda. Following his recent ‘win’ against Canada and Mexico, which earned both countries a one-month extension, Trump announced the imposition of an extra 25% tariff on steel and aluminum imports, which is expected to commence today.

Trump also talked about “reciprocal tariffs”, an approach apparently targeting VAT and/or import tax imbalances. For example, European countries impose higher VAT on US products compared to the VAT imposed by the US government on EU products.

The markets always knew that the next 'target' was going to be the EU. Interestingly, the EU is apparently ready to defuse the situation by offering to lower its import tax preemptively. At the same time though, outgoing German Chancellor Scholz showed an unexpected fighting spirit by signaling the EU’s readiness to quickly respond to any tariff-related announcements by Trump. Oddly, a quick EU capitulation on Trump’s demands might not be the best strategic option for the EU at this stage.

US data remains solid

Meanwhile, Friday’s US economic releases concluded a mixed data week. US stock indices seemed to respond positively to the solid nonfarm payroll print - which also saw a decent upward revision to December’s figure - the lower unemployment rate and the stronger earnings growth. These data prints continue to indicate a solid US economy, undisturbed by a potential trade war. However, this positive sentiment was dampened by the University of Michigan consumer sentiment readings and particularly the 1-year inflation print, which rose to 4.3.

The next key data print comes in on Wednesday, with the January CPI report. Trump is pushing for lower interest rates and remains critical of Fed Chairman Powell’s recent decision to keep rates unchanged, but he is also happy about the strong US economy. He may soon realize that these two conditions cannot occur at the same time.

Dollar gains, equity indices behaving maturely

Amidst these developments, the dollar managed to limit its weekly losses against the euro, with the pair hovering at 1.0320 at the time of writing, while the euro continues to lose ground against the pound. US equities had a mixed week, with only the Nasdaq 100 index managing to finish in the green, underperforming again compared to their European counterparts. The stronger Chinese CPI report has resulted in slightly more positive sentiment in Asian equities, but it will be interesting to see if this will last once the US markets open.

Gold continues its journey higher, oil’s trend unclear

The unofficial release of Trump’s peace plan for the Ukraine-Russian conflict did not dent demand for the precious metal. Gold has recorded a higher high, trading at $2,897 at the time of writing, also fueled by tariff concerns and US data pointing to higher inflation going forward. The next big level is $2,900, but with the wider uncertain environment, gold’s rally might still have legs.

On the flip side, oil faces a mixed outlook at this stage. A full-blown trade war between the US, EU and China would unquestionably damage global growth rates, thus reducing the already subdued demand for oil. However, should Trump harden his stance on tariffs, and the Ukraine-Russia conflict ends by Easter, as Trump aims for, then bearish pressure could intensify.