Resurgent trade fears weigh on risk

US stock exchanges were closed yesterday in observance of Martin Luther King Day. But the futures markets weren’t. US stock index futures were sharply lower again this morning. In early trade, the S&P 500 was down around 1.7% from Friday’s close.

Source: TN Trader

This jump in risk aversion came after President Trump ramped up his tariff threats on eight European countries (Denmark, Germany, France, the UK, Norway, Sweden, the Netherlands and Finland) after they criticised his moves to take over Greenland. His threat includes tariffs starting at 10% in February and rising to 25% by June if a deal is not reached. The US President upped his aggressive rhetoric overnight. 

In an interesting, but no doubt unwelcome development for UK Prime Minister Kier Starmer, Mr Trump called the UK's plan to hand over sovereignty of the Chagos Islands to Mauritius an ‘act of great stupidity’. Poor Sir Kier must be wondering what happened to his ‘special relationship’ with The Donald.

This morning has marked the first opportunity for investors to assess their exposure to individual US equities since Friday night. There were losses across the board, with most of ‘Mag Seven’ and other US tech giants down over 3% in early trade. Netflix was little changed as investors prepare for its fourth quarter earnings after tonight’s close. United Airlines and 3M also report today.

While some on Wall Street argue any tariff-driven sell-off could be a buying opportunity as the earnings season picks up steam, the scale and breadth of Trump’s rhetoric have unsettled risk appetite. Attention is also building around a potential Supreme Court ruling on the legality of the tariffs, which could inject further volatility into markets.

Nevertheless, ‘buy the dip’ appears to be embedded in traders’ muscle memory, so it may prove difficult to shift, particularly if combined with last year’s overworked adage that ‘Trump Always Chickens Out’. But maybe things have shifted. And should a dip-buying rally meet with further selling pressure, then it’s possible that stocks suffer more than a bit of a shake-out.

European stock indices fell sharply this morning, extending Monday’s decline. Investors digested President Trump’s threat to impose tariffs on eight European nations should negotiations over Greenland fail. Perhaps unsurprisingly, European markets are being hit harder than US ones for now. While the S&P 500 was down around 1.7% from Friday’s close earlier this morning, the German DAX had dropped close to 3% over the same period.

Source: TN Trader

Trade concerns are now front and centre, with European leaders pushing back against Washington’s stance and reportedly discussing countermeasures. The potential use of the EU’s Anti-Coercion Instrument has added to market unease, particularly for export-heavy sectors such as autos and luxury goods, which have already come under pressure.

There also appears to be a split over how Europe should respond to Mr Trump’s threats. While UK Prime Minister Starmer pursues a softly-softly approach, insisting that jaw-jaw is better than war-war, French President Macron favours a more aggressive approach and wants to fight US tariffs with European ones.

Focus now turns to the World Economic Forum in Davos, where global leaders are gathering amid heightened geopolitical tension. President Trump is due to address the forum tomorrow, although markets should be reading for a verbal intervention at any time. Escalation or softening in tone seems likely to set the direction for European risk assets in the days ahead.

The US dollar is on the back foot once again. Renewed tariff uncertainty from the Trump administration has undermined confidence and given risk sentiment a battering. The Dollar Index has now fallen around 1% from Friday’s close, which was itself a six-week high, to drop back towards 98.00 in early trade.

Source: TN Trader

The euro and sterling have been this morning’s main beneficiaries, with the former now back above 1.1700, while the latter closed in on 1.3500. The Japanese yen made modest gains versus the US dollar. But in an indication of just how vulnerable the yen remains, it dropped sharply against other major pairs.

It is now back within sight of all-time lows against the euro. The currency is weighed down by rising Japanese bond yields and fiscal concerns following the announcement of a snap election due to take place early next month.

Meanwhile, traders must also consider Friday’s monetary policy meeting from the Bank of Japan (BOJ). No change in rates is expected. But it’s quite possible that the BOJ may comment on persistent currency weakness.

The major beneficiaries of the current derisking have been precious metals. Gold surged to a fresh all-time high overnight, having barged its way above $4,700 in the early hours of this morning.

Gold’s rally since the new year is a complete vindication for the bulls, and a slap in the face for those (like me) who have continually warned that the metal required more of a pullback and consolidation before it could push up to fresh highs.

Source: TN Trader

Of course, the higher it goes, the bigger the possibility of a large downside correction. But timing is everything, so congratulations to all those traders who have managed to hang on for the ride. Don’t forget to book some profits.

The same goes for silver, but times ten. While silver’s overnight rally was unusually subdued when compared to gold’s, it was more than enough to drive it to a fresh record high above $95 per ounce.

Source: TN Trader

Geopolitical uncertainty has boosted demand for both precious metals, just as they were taking off in a near-parabolic fashion. They have become the havens of choice for investors, and this has been bolstered by recent US dollar weakness. Silver also has a strong back story.

It is a relatively small market, at least when compared to gold, and stories of supply shortages and a short squeeze have added to the bullish narrative. In such situations, the obvious fact that it remains exceedingly overbought according to its daily MACD is not an issue – until it is. So again, congratulations to all bulls who have ridden this to all-time highs. But be mindful of the rising risks up here.

Crude oil was a touch firmer in early trade this morning. Prices appear to be consolidating now, having pulled back sharply from the ten-week high hit just under a week ago. One week before that, front-month WTI dropped sharply to trade briefly below $56 per barrel.

Source: TN Trader

This was soon after the Trump administration successfully extracted Nicolas Maduro and his wife from Venezuela. Crude prices then soared, adding around 12% over the following week. This saw crude break out of the downtrend that had been building since the August highs.

While it has dropped back from its recent highs, it still hasn’t returned to its downtrend. There are many moving parts to this. The market must consider the ongoing global imbalance whereby supply is plentiful while estimates of future demand suggest that growth continues to slow.

In the meantime, geopolitical tensions remain elevated, given that President Trump’s renewed push to take control of Greenland has added to uncertainty.

Natural gas continues its sharp ascent. Prices have jumped 14% since last Thursday’s low. Cold weather forecasts and dwindling inventories drove aggressive buying, with volatility elevated and price action fast-moving. But it’s worth putting this move into perspective by considering that gas prices have effectively halved over the six weeks prior to last week’s low.

Nevertheless, the rally underscores how sensitive the gas market remains to weather-driven demand shocks. While the broader energy complex struggles, gas has emerged as an outlier, attracting short-covering flows which have helped boost upside momentum.

The ongoing selloff across global equities, driven by a sharp decline across US stock index futures since Friday, appears to be strong evidence of investor risk aversion. This has spread out to Bitcoin and Ether, raising doubts over the resilience of their recovery since mid-December. This has seen Bitcoin and Ether drop back below $91,000 and $3,100, respectively.

It could be that investors pile back in to hoover up risk assets once the US exchanges reopen later today. This has been the play since October 2022. But if not, and should the selling intensify, then both cryptos are in danger of breaking their recent uptrends.

Crypto is struggling to decouple from equities, with safe-haven demand flowing toward metals rather than digital assets in this environment. The sector remains highly sensitive to shifts in sentiment, and for now, macro forces are firmly in control.

The VIX remains elevated after a sharp spike following tariff headlines. While it has stabilised for now, volatility remains sensitive to further developments around Greenland, trade policy, and geopolitical risks. The jump in volatility reflects how quickly sentiment has shifted, with markets moving from complacency to caution in a matter of sessions.

Tariff headlines dominate as President Trump threatens escalating levies from February if no Greenland deal is reached. Global leaders convene in Davos with trade, security and geopolitics firmly in focus. Japanese political risk builds ahead of February’s snap election.

Netflix reports after the bell, offering an early test of market confidence in corporate guidance. With metals surging, equities under pressure, and volatility elevated, risk sentiment has clearly shifted. After a bruising run for the bears, they have regained control — for now.