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MARKETS

As the new Trump presidency unfolds with frenetic energy, Wall Street has swiftly recaptured its fizz, driving stocks to soar to record heights on Thursday. This resurgence is fueled partly by Trump’s aggressive push to amplify investments in artificial intelligence, reigniting the tech fervour that helped the market achieve 57 record highs last year. Meanwhile, despite a slight uptick in bond yields, volatility indexes have dipped to their lowest levels this year, offering a conducive backdrop for stocks. Lower volatility is as pivotal as subdued interest rates for channelling flows into equities.

Thanks to the overnight drop in oil prices, which is very positive for risk markets, concerns about inflation expectations have eased, contributing to a decrease in the policy-sensitive two-year yield. This situation gave investors a triple shot of bullish energy, akin to an espresso, energizing them to keep pressing the buy button on their trades. If these conditions persist, this buoyant market environment signals a welcome reprieve for traders, setting the stage for a potentially sustained period of bullish activity.

This week has also witnessed a notable appetite for sovereign debt across developed markets, with robust investor orders quelling some early concerns about government funding. This robust demand is partly attributed to institutional investors re-engaging with duration trades they had pared back at the end of last year. Supportive of this trend are benign inflation readings from the United States, Canada, and Europe, which have contributed to reducing the "term premium" embedded in 10-year Treasuries to its lowest point of the year.

ASIA MARKETS

Asian markets are poised to catch the wave of optimism radiating from Wall Street, buoyed by a drop in oil prices that generally favours the region's heavy oil-importing economies. As U.S. indices climb, spurred by bullish sentiments and easing inflation concerns due to falling oil prices, Asian stocks are expected to open higher, riding on the coattails of their Western counterparts. This positive shift is particularly significant for energy-intensive markets in Asia, where lower oil prices can reduce import bills and support broader economic stability.

CHINA MARKETS

As the stimulus rally waned, China resorted to state intervention to buoy its markets. Such measures are standard in Asia, where governments are keen to prevent wealth erosion. In China, however, the economic challenges are more akin to 'death by a thousand cuts' since the COVID era. While mutual insurance funds and shareholders might appreciate the mandate to buy more equities—given their tendency to appreciate over the long term—I'm not disputing that. My point is that these new mandates are merely cosmetic fixes to deeper systemic issues, such as the significant erosion of housing wealth. State-mandated stock-buying only serves to reinforce critiques of the administration's handling of economic policy.

Interestingly, during his appearance in Davos, President Trump shifted tones and spoke positively about his relationship with Chinese President Xi Jinping. He attributed the recent strains between Washington and Beijing to his predecessor, Joe Biden, and expressed optimism that China could play a role in resolving the conflict in Ukraine. This softer approach suggests a potential thaw in relations, which could have significant implications for Chinese markets, especially if it leads to more collaborative economic policies.

FOREX MARKETS

As the week wraps up, investor attention shifts from the political theatre in Washington and Davos to the monetary decisions unfolding in Tokyo. The Bank of Japan is poised to raise rates to a potential 17-year peak of 0.5%. With the market pricing a 95% likelihood of a quarter-point hike, all eyes are now on Governor Kazuo Ueda’s upcoming press conference for clues on the BOJ's future monetary trajectory.

For yen traders, the stakes are exceptionally high. Despite the anticipated rate hike, the yen remains weak at 156 against the dollar. The BOJ would need to signal a more aggressive tightening cycle for the yen to rally, possibly hinting at further rate increases later in the year. However, the more probable scenario is that the BOJ maintains its current cautious stance, emphasizing a gradual approach to rate hikes. This setup suggests that we may see a "dovish hike," which could keep the USD/JPY poised for stability or even further softening if the BOJ's tone remains measured and non-committal on rapid policy tightening.

Stabilizing the equity and bond markets through a “ dovish hike” can inadvertently introduce volatility into the currency markets, potentially pressuring the yen towards the 158.00 level against the dollar. Rapid yen appreciation is equally undesirable, often triggering broader market turbulence due to Japan's significant global financial footprint, with over $3.3 trillion in net foreign assets. The risk of Japanese investors repatriating unhedged flows en masse is a scenario policymakers are eager to avoid. Thus, the Bank of Japan often finds itself navigating between a rock and a hard place, attempting to balance these complex forces in a tightrope monetary policy act.

OIL MARKETS

There was no substantial update overnight regarding President Trump's anticipated tariff initiatives. Despite previous assertions about potential tariffs on China, the European Union, Canada, and Mexico, his "Day One" promises have yet to materialize, leaving an air of uncertainty fogging the currency markets in the coming weeks. Instead, the spotlight shifted to Trump's remarks about OPEC during his appearance in Davos, steering the focus away from tariffs and onto broader geopolitical energy dynamics.

Oil prices are on a downtrend as President Trump intensifies pressure on OPEC and Saudi Arabia to boost supply.

In a speech to executives in Davos on Thursday, the US president urged Saudi Arabia and other producers to lower the cost of crude oil, expressing dismay that they had not done so already. “I’m going to ask Saudi Arabia and Opec to bring down the cost of oil. You gotta bring it down. Which frankly I’m surprised they didn’t do before the election,” Trump said.

This move aims to enable global central banks, including the Fed, to cut rates as energy-driven inflation eases. Meanwhile, Trump’s Treasury Secretary nominee, Scott Bessent, posits that America could ramp up its oil production by 3 million barrels per day by 2028.

This pivotal question now looms large for oil traders: How significantly will oil prices drop in response to the approaching peak in Chinese oil demand, which is being hastened by the nation's rapid transition towards green energy, especially as global oil production escalates? This scenario sets the stage for a potential recalibration of the energy market dynamics, as increased supply might collide with diminishing demand from one of the world's largest consumers.

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