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MARKETS

US stocks surged on Tuesday, riding the wave of optimism on the first full trading day of President Donald Trump's second term. Investors were buoyed by a series of executive orders but omitted a less confrontational trade approach than many had feared. Notably, he did not mention imposing tariffs on China, one of the U.S.'s largest trading partners—a silence that may signal a strategic pause or shift in trade policy.

The Dow Jones Industrial Average soared, climbing 1.13%, or nearly 500 points, while the S&P 500 advanced by 0.87%. The Nasdaq Composite, often sensitive to trade developments, also saw gains, increasing by 0.76%.

Meanwhile, the 10-year Treasury yield edged down about 4 basis points to 4.57%, still riding the waves of a dovish onslaught from Federal Reserve Governor Waller and bolstered by a strategic delay in tariff implementations. This recalibration further anchored last week's rally in US Treasury yields, further supported by mutual fund data indicating a shift to resetting duration longs for the early weeks of 2025, reversing the pronounced preference for duration shorts as the year turned. This adjustment in yields and the continued easing of the dollar has boosted global stock markets, underlining the profound impact of rates and bonds on equity trading since last year.

While investors remain wary of potential surprises from Trump’s social media—a known trigger for market volatility—the lack of immediate, harsh tariffs has temporarily relieved their concerns. Investors are now cautiously optimistic, focusing on the U.S.'s robust economic indicators, strong earnings reports, and the prospect of lower borrowing costs and increased capital inflows. This blend of factors is expected to propel U.S. stocks higher throughout 2025, barring any unexpected trade escalations.

In sum, the delay in imposing new tariffs has been widely regarded as a significant positive for markets.

However, even as President Trump grants a stay of execution on tariffs, the suspense over their future hangs heavy in the air. Yet, Day One of Trump's second term revealed a crucial insight: the US stock market's performance is a critical barometer for his administration. Recognizing the turmoil that a 60 % Chinese tariffs could unleash on Wall Street, Trump wisely postponed them, opting for a period of strategic recalibration. This move aims to ensure that future tariff decisions align and are perhaps buffered with US market-friendly policies, smoothing out potential economic turbulence ahead.

Moreover, the stock market’s significant role in Trump's policy considerations could act as a crucial guardrail, tempering his approach to tariffs. This suggests a more layered strategy than merely hammering the global economy with unilateral trade penalties, steering clear of a one-way tariff onslaught many feared.

ASIA MARKETS

Investors across Asia should continue to feel a sigh of relief after President Trump's decision not to impose massive tariffs on China immediately. There's a palpable hope that his tariff strategy might lean toward “Big Stick Tariff Diplomacy" rather than a carte blanche approach. This more civil start to President Trump's second term has set a positive tone for Asian markets. On Wednesday, the atmosphere is optimistic, buoyed by steady global FX markets, falling Treasury yields, and robust gains on Wall Street, with Nikkei futures suggesting a 0.75% uptick at the Tokyo open.

China's financial markets are exceptionally focused, riding high on Trump's initial non-confrontational approach to tariffs. The yuan experienced its most significant rise since early November and enjoyed its best day in spot market trading since August. This initial market calm presents a critical window for investors to navigate these early days of Trump's renewed presidency with cautious optimism.

THE DOLLAR WHIPSAW

Day two of President Trump’s second term has traders wielding whipsaws through global currency markets as they try to decode his enigmatic trade policy. While Trump’s affinity for tariffs is well-known, the real tension lies not in whether but where and how extensively he will impose them. This uncertainty leaves the dollar and its global counterparts on edge, anticipating erratic trading sessions.

This atmosphere of unpredictability isn’t just confined to currency markets; it permeates various asset classes, though the FX markets are feeling the most immediate strain. As traders anxiously speculate on the specifics and breadth of potential tariffs targeting America's major trading partners, a palpable tension pervades, casting a long shadow of FX volatility across global financial landscapes.

For the coming sessions, which may extend into the next few weeks, traders will have more questions than answers.

OIL MARKETS

Oil futures took a dip on Tuesday, with traders recalibrating their expectations for crude supplies following President Donald Trump's pledge to amplify the U.S.'s already record-high crude output. Contributing to the bearish sentiment, the Energy Information Administration (EIA) highlighted a forecast of robust global growth in petroleum and other liquids production paired with a slowdown in demand growth. This dynamic is expected to exert downward pressure on prices, potentially counterbalancing heightened geopolitical tensions and OPEC+'s voluntary production cuts.

A pivotal element of President Trump's strategy to ramp up U.S. oil production hinges on persuading industry leaders to activate more wells, particularly in the shale regions and the Gulf of Mexico, where recent advancements in extraction technology could significantly enhance output. The agility of shale production, known for its ability to adapt to market changes quickly, positions it as a uniquely responsive sector within the broader oil industry.

President Trump has also hinted at plans to replenish the U.S. Strategic Petroleum Reserve, which currently holds 394.4 million barrels, well below its maximum capacity of approximately 700 million. This follows a record sell-off during Biden's administration. Refilling these reserves could stabilize or even push up oil prices if implemented as one of Trump's first directives. However, any action to refill the reserves must be price-sensitive to avoid market disruptions. Fortunately, the U.S. is not under immediate pressure to act, thanks to its vast strategic oil reserves located in the Gulf of Mexico and shale regions, which provide a substantial buffer and flexibility in managing the nation's energy strategy.

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