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MARKETS

US stocks staged a rebound on Monday as investors appeared unfazed by Trump’s latest tariff threats, which include new levies on steel and aluminum imports. Markets, having already navigated the Canada and Mexico tariff rollercoaster and reciprocal tax headlines, seem to be pricing out the headline risk, opting to sit back and wait for actual implementation rather than reacting to every new proclamation.

But let’s be clear—this isn’t exactly bullish price action. If anything, it smells like a classic short-covering rally or even a dead-cat bounce, rather than a fundamental shift in sentiment. The broader uncertainty around tariffs, Big Tech, and interest rates makes blindly chasing this move feel reckless. If anything, stepping back and letting the tariff chessboard unfold seems like the more rational play.

For traders, however, stepping away isn’t an option. The tariff hamster wheel keeps spinning, and the reality is, reacting to an evolving trade war with incomplete information is a dangerous game. That’s why we’re still stuck in whiplash mode, where the market lurches back and forth, unable to fully commit to any single direction.

Perhaps a better analogy is the boy who cried wolf—Trump’s supercharged tariff threats, once a market-moving force, are losing their element of surprise. Investors have seen this show before. They know that initial threats often morph into negotiations, rollbacks, or exemptions, making it harder to justify extreme positioning until tangible, actionable policies are enacted.

Still, if reciprocal tariffs do go through, the real pain will be felt in emerging markets. Countries with higher effective tariffs on U.S. goods—think South Korea, India, Mexico, and China—are at risk of being in the crosshairs. If Trump makes good on his promise, EM assets could face a serious headwind, especially in nations already dealing with structural weaknesses.

( Chart via Robin Brooks Senior Fellow Brookings Institute)

Bottom line? Traders are playing a waiting game, trying to gauge whether this rally has legs or is just another fake-out before the next tariff shoe drops. Until then, positioning too aggressively in either direction is like stepping onto a chessboard where the rules are still being written.

Beyond the global trade drama, investors are zeroing in on this week's key inflation data and Fed Chair Jerome Powell’s testimony before Congress—both of which could set the tone for market direction.

According to the New York Fed’s Survey of Consumer Expectations, inflation expectations for the next year and three years ahead remained steady at 3% in January, a sign that consumer sentiment hasn’t dramatically shifted despite ongoing tariff concerns and rising geopolitical risks.

Powell’s testimony will be the real wildcard. Markets will be looking for any hint of flexibility on rate cuts, especially as traders have pared back expectations following last week's stronger-than-expected jobs data and a tariff-fueled uptick in inflation expectations. If Powell sticks to the script and reiterates a patient approach, it could keep Treasury yields elevated and reinforce the dollar’s strength, adding pressure to risk assets.

With markets already fragile from tariff whiplash, Powell’s remarks—combined with fresh inflation prints—could either validate traders' patience or force a major repricing across asset classes. Either way, buckle up, because this week is shaping up to be another one where headlines drive the tape.

ASIA MARKETS

Tuesday's Asian session is set to be a slow burn, with a light calendar keeping macro traders focused squarely on tariff developments and currency moves. But while the broader market waits for the next trade war chess move, all eyes should be on the yuan, as the gap between the PBOC’s daily fix and the spot market rate stretches dangerously close to record levels.

Since reopening post-Lunar New Year, China’s currency has been caught in a relentless downdraft, with USD/CNH climbing for four straight sessions, now back above 7.30. With momentum building, the critical 7.35 level from September 2023 is now within striking distance—a breach would be the first since December 2007, setting off alarm bells across FX markets.

But Beijing isn’t going down without a fight. The PBOC has been planting its flag around 7.17, using its daily fix as a psychological anchor to slow the yuan’s slide. The result? A widening spread between the official rate and where the market actually wants to trade. If this gap continues to stretch, we could see a forced intervention or stronger verbal guidance from policymakers to rein in expectations.

With trade tensions heating up, tariff headlines cycling faster than algo triggers, and yuan depreciation pressure intensifying, this week could set the stage for some explosive price action in the FX space. The yuan is the canary in the coal mine—watch it closely.

Mainland equities are nudging higher, defying the persistent economic gloom and tariff noise as DeepSeek ignited fresh optimism in China's beaten-down tech mega caps. While market cynics often dismiss any rally in China as state-engineered, the meteoric rise of AI startup DeepSeek has forced investors to re-evaluate the long-term AI potential of China’s internet giants—a sector left for dead in recent years.

With property investment in a deep freeze, the traditional wealth generator for Chinese households has all but disappeared, leaving investors scrambling for alternatives. Gold remains an obvious hedge, but a more aggressive bet is forming in the tech space, mirroring the role of Mag 7 stocks in US hedge fund portfolios—a defensive yet high-upside play on the future of AI.

The AI FOMO is spreading fast. Alibaba wasted no time touting its latest AI model, launching mere days after DeepSeek’s debut, with claims of even better results. The message is clear: China's tech giants are not sitting idle, and local investors are starting to take notice.

While structural headwinds still loom large, this nascent AI arms race could serve as the long-awaited spark for a sector that has been searching for a narrative shift. The question now is whether investors are willing to ride the wave—or if skepticism will keep a ceiling on the rally.

FOREX MARKETS

The U.S. dollar is trading purely on tariff headlines, with each shift in trade policy sending FX markets into a tailspin. The lack of any major trade announcements on Inauguration Day (Jan. 20) saw the dollar drift lower, only to spike on Feb. 1, when Trump announced tariffs targeting Canada, Mexico, and China. But by Feb. 3, when news broke that Canada and Mexico would get a temporary reprieve, the greenback gave back gains. Now, it’s climbing again—and for good reason. More tariffs are coming.

This market is moving like a binary options trade on Trump's next tariff tweet, and that’s exactly the problem. Unlike traditional macro cycles where rate expectations, inflation trends, and economic data dictate direction, we are in a policy-driven FX environment, where tariffs are shaping the USD’s every move. That means volatility stays elevated, traders remain on edge, and positioning flips with every new headline.

The bigger concern? We’re only getting started. The upcoming April 1 trade report is expected to recommend a sweeping set of tariffs under Section 232 (national security) and Section 301 (unfair trade practices), meaning the U.S. will likely hit multiple trading partners with fresh restrictions. The more tariffs, the greater the inflationary spillover, which markets are already starting to price in.

For now, the dollar remains in a “buy-the-tariff” mode, but if this escalates beyond short-term positioning, expect deeper structural shifts—not just in FX but across global supply chains. The next round of moves won’t just be about headlines—they’ll be about real economic consequences.

The View:

I'm truly glad I stepped away from the screens in Asia and London yesterday, giving myself some space to reassess before diving back into old faithful—the US dollar—overnight. Re-entering EUR and CNH shorts on a scalable position felt like the right move as the US carry trade clarity struck me again.

The rate market is now pricing in just 2 bps of cuts for March and doesn’t expect the next Fed cut until mid-year. In contrast, the BoE, ECB, and PBoC are all on clear rate-cutting trajectories, making the divergence even more pronounced. The Fed maintaining its position while other major central banks ease only widens the policy gap, and in FX, that’s music to the dollar’s ears.

While market sentiment may fluctuate based on Powell’s testimony and incoming inflation data, the fundamental backdrop still skews in favour of the greenback. The carry trade is alive and well, and until we see a material shift in US macro data, it’s challenging to argue against dollar strength in the near term.

And I'll follow up with what is essentially the key to the short EUR/USD trade—the widening USD-EUR rate differentials. This remains the core driver, and I’ll be breaking down exactly why USD-EUR spreads have room to expand even further in today’s FX report dropping at the New York open.

GOLD MARKETS

When correlations start breaking down, like gold ripping higher despite a stronger dollar, rising U.S. yields, and no visible signs of panic or systemic stress, it’s time to take a deeper dive under the hood. The real question isn’t just why gold is moving, but why it’s the only asset reacting to Trump’s tariff headlines—because something else is clearly at play.

My read? Global central banks are hoarding gold at an unprecedented pace, locking it away in vaults where it won’t see the light of day for decades. This isn’t your typical paper gold that ebbs and flows with speculative positioning—this is real, physical gold getting taken off the market permanently.

Even in the paper gold space, the market has turned into a one-way street, with COMEX inventories swelling and lease rates spiking as demand outstrips supply. Western investors, historically underweight gold compared to their Eastern counterparts, are still slow to react, but the tide is shifting. While China, India, and Russia have been accumulating gold for years, the West is waking up again to the idea that gold isn’t just a hedge—it’s an alternative monetary asset.

So what’s driving the latest leg up? A combination of relentless central bank buying, real scarcity in physical markets, and the growing perception that geopolitical uncertainty is here to stay. Tariffs may just be the headline driver, but the underlying force is something much bigger—gold’s return as the ultimate form of monetary insurance.

With settlement day fast approaching on February 26, COMEX is stockpiling gold at an unprecedented pace. London is running short, and overnight leasing rates for gold have surged as high as 12%, a clear indication of supply stress. The big tell? Traders are increasingly demanding physical delivery rather than settling contracts in cash, an unmistakable signal that confidence in paper gold is eroding.

This shift isn’t just noise—it’s a structural move. When COMEX inventories swell while available metal elsewhere tightens, it suggests a squeeze is brewing. If settlement pressures mount, the market could be facing a scenario where the demand for physical gold far outweighs what’s readily available for delivery.

With Trump’s tariff barrage adding another wildcard to global markets and central banks, particularly in the BRICs, accelerating their accumulation of gold reserves, the stakes are rising. If COMEX is hoarding, they’re not doing it for nothing—something big is brewing beneath the surface.

WHAT’S THE BUZZ ON THE COMEX?

The buzz around Brookfield Place in Battery Park, home to the COMEX, is reaching fever pitch as the London gold market scrambles to move 999’s kilo bars to New York. The maneuver has sent short-term borrowing rates surging, a clear signal that traders are bracing for turbulence.

The driving force? Fear that Trump could set his sights on precious metals for tariffs—even if the possibility still feels remote for now. But in markets, perception often becomes reality, and the mere whisper of gold as a potential trade war casualty has set off a flurry of repositioning.

With global central banks hoarding bullion at record levels, COMEX is finding itself at the center of a physical gold squeeze that has already sent overnight leasing rates soaring as high as 12%. If this continues, we could see some serious settlement risk brewing as traders increasingly opt for physical delivery over cash settlements.

This isn’t just about hedging against tariffs—it’s about securing what may soon become the hardest asset to source if geopolitical tensions escalate. Whether Trump fires a direct shot at gold or not, the market is already making its move.

OIL MARKETS

Oil is clawing back from yearly lows as shrinking Russian crude flows and aggressive Middle Eastern price hikes throw a wrench into the bearish narrative. Iraq, OPEC’s second-biggest producer, just hiked its selling price to Asia to its highest level since September 2022—following Saudi Arabia’s sharp price increase last week. The UAE also pushed prices to their highest levels since September, driving the entire Middle Eastern multi-grade complex higher, much to President Trump’s frustration.

But let’s be real—Trump won’t stay quiet on this for long. His "drill, baby, drill" rhetoric has already fueled expectations of increased U.S. production to counteract rising global prices, and we could see pressure mount on OPEC+ to ease supply constraints. However, oil bears—who have piled in short post-tariff shock—now have another headache to contend with: renewed geopolitical risk.

Shipowners are growing uneasy, fearing that Trump’s suggestion of taking over Gaza could trigger a resurgence in Houthi attacks on commercial vessels. The potential for another round of Red Sea disruptions is adding a risk premium, keeping prices from collapsing further despite a wave of hedge fund short positioning.

While macro pressures remain tilted toward lower demand, it’s not a one-way street—Trump vs. OPEC+ is the next major battle, and oil traders will be watching every headline for signs of another shakeup.

OPINION

Since post-COVID, I’ve been of the view that survey data—like the University of Michigan Consumer Sentiment Survey, ISM, and PMI reports—is fundamentally flawed. Whether it’s purchasing managers half-heartedly checking random boxes or consumer sentiment being skewed by sheer political bias, these numbers often feel more like noise than actionable macro signals.

Take the U. Michigan survey, for example—it’s notoriously volatile and highly susceptible to headline-driven mood swings. A tariff bombshell, an election cycle, or even a random stock market rally can swing the data wildly from month to month. And let’s not forget the partisan divide—Republicans under Trump and Democrats under Biden have consistently reported polar opposite views on the economy, regardless of actual conditions.

While political bias in economic data is nothing new, I've never seen anything quite like this—Trump Derangement Syndrome in full force. Typically, this term is thrown around as an insult toward the liberal media, but at this point, it seems to have infected everyone.

Take inflation expectations. The average Republican now thinks inflation will be close to zero over the next 12 months, while the average Democrat is bracing for price hikes north of 5%. That’s not just a difference in perspective—that’s two entirely different realities. The swing in longer-term inflation expectations is even more extreme, making it painfully clear that macro sentiment has become completely unhinged from actual economic conditions.

Some degree of political bias in economic outlooks is normal—partisan leanings have always shaped how people interpret the economy. But these extremes go beyond divergence into outright derangement. It’s no longer just about how people feel about inflation—it’s about which version of reality they subscribe to.

Then there’s ISM and PMI data, where it often feels like purchasing managers are just going through the motions, checking off responses without much thought. The post-pandemic economic landscape has been far more fluid and complex than the traditional survey methodologies account for, and I suspect the reliability of these reports has eroded significantly.

At this point, I take these surveys with a massive grain of salt and lean much more on hard data—actual spending, employment, wage growth, and inflation trends—to gauge the real pulse of the economy. Markets still react to these reports, so they can’t be ignored entirely, but in terms of macro signal quality, they’ve lost a lot of their credibility.

This kind of polarization messes with markets, consumer behavior, and even policy-making. Suppose a large chunk of the population refuses to believe inflation is falling (or rising) because it doesn’t fit their political narrative. In that case, it creates a feedback loop that can distort actual economic trends. And if this is the new normal, it makes reading economic sentiment data even more useless than before.

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