10 Feb 2025

1. The month of February has thus far witnessed a stagnation in risk assets. While the Dax and FTSE 100 achieved new all-time highs last week, the overall gains for European assets remained modest, and US equity indices experienced declines in both blue-chip and mid-cap stocks. The performance of the dollar was varied, as was that of commodities, with gold also attaining a new record high. In Europe, the bond market remained largely stable, accompanied by slight flattening in the US Treasury yield curve. A confluence of earnings announcements, tariffs, and a mixed payrolls report has contributed to a sense of unease among markets and investors as we advance through the first quarter.

1. Tariff Threats Persist for Another Week
   
   As we embark on a new week, markets must now contend with another series of tariffs. President Trump has declared his intention to impose a 25% tariff on steel and aluminum imports starting Monday. Concurrently, China is set to implement tariffs on $14 billion worth of U.S. goods in response to the United States' 10% blanket tariff on all Chinese imports. Although $14 billion may seem modest in trade terms, the symbolic significance is likely to have a considerable effect on market sentiment. This situation underscores the inability of China and the U.S. to reach a consensus on a tariff-free path forward, effectively igniting a new trade conflict between the two largest economies in the world. Expectations that the U.S. might retract tariffs, as it did with Mexico and Canada, have been dashed. Additionally, China's new measures will encompass export restrictions on rare earth minerals, which are essential for the production of smartphones, certain chips, batteries, and renewable technology infrastructure, potentially exerting downward pressure on technology stocks at the beginning of this week
2. Market Response to Expanding Tariffs Across Sectors  
   The market's initial response to the announcement of new tariffs has diminished over time. Bitcoin experienced a significant drop, declining by over $1300 immediately following the news; however, it has since rebounded, gaining $1844. In recent weeks, Bitcoin has closely mirrored the performance of the stock market, particularly the technology sector, suggesting that investors may be adapting to the ongoing tariff threats posed by the Trump administration. Conversely, the foreign exchange market has shown heightened sensitivity to these tariff announcements, with the dollar experiencing a rally at the beginning of the week as investors flocked to it. Following the announcement of tariffs on steel and aluminum, both EUR/USD and GBP/USD saw declines, although they have managed to recover some of their losses against the dollar. The Japanese yen has also depreciated against the dollar, as Japanese steel exports may face challenges due to the tariffs, although the Nikkei index has managed to achieve a modest gain thus far. Notably, the strong dollar has been frequently cited in numerous earnings calls as a potential risk to future profitability, indicating that the dollar's strength at the start of this week may exacerbate challenges for U.S. equities in the future.
3. Trump's recent announcement of tariffs late on Sunday is noteworthy, as it indicates a lack of concern regarding market reactions. Historically, he has typically revealed tariffs earlier in the weekend, seemingly to gauge responses and allow himself the opportunity to reconsider before any significant declines in stocks or risk assets occur. This timing may imply Trump's firm intention to implement tariffs on specific industrial metals. Notably, these tariffs are directed at particular products rather than entire countries, complicating the potential for negotiations. This action could potentially elevate gold prices, as it may trigger increased demand for gold to be brought into the United States, especially if tariffs on precious metals are also introduced. Investors are left to ponder whether gold will attain the psychologically important $3,000 mark amid the escalating tariff measures. As of early Monday, the gold price has already risen by $25.
4. Is Europe the next target?
   
   The President of the United States has also signaled the market regarding the potential implementation of additional 'reciprocal' tariffs later this week. This means that the US may impose tariffs on foreign goods if similar tariffs are levied on American exports. This situation could particularly affect countries that maintain significant trade surpluses with the US. We believe there is a considerable likelihood that European products will encounter tariffs this week, which could dampen investor sentiment towards European equities following a strong start to the year. The DAX has risen by nearly 10%, the CAC by 8%, and the FTSE 100 by over 6%. The automotive sector in Europe may face challenges at the beginning of the week, especially for Porsche, which has outperformed other global automakers. However, if President Trump decides to target Europe this week, it is likely that he will prioritize the automotive and pharmaceutical sectors. A comprehensive tariff on European imports to the US could severely impact European economic growth and would likely provoke a significant market response. It remains to be seen whether this situation will compel European leaders to concede to Donald Trump’s demands; thus far, their rhetoric has been confrontational, with threats of imposing retaliatory tariffs, which may not bode well for future relations.
5. Elliott Takes Aim at BP
   
   In recent developments, BP is poised to respond to the news that activist investor Elliott has acquired a substantial stake in the company. This marks another instance of activist investors focusing on BP, as Bluebell Capital Partners had previously voiced concerns regarding the company's performance last year, even calling for significant leadership changes, including the removal of the chairman. Similar to Bluebell, Elliott is advocating for BP to abandon its plans to scale back fossil fuel operations. However, Elliott's reputation and history of successfully implementing corporate changes set it apart from Bluebell. The exact size of Elliott's stake and its strategic intentions for BP remain unclear; it is uncertain whether the firm intends to pursue a breakup of the company or advocate for a sale. BP's shares have appreciated by 10% this year, although they still fall short of the peaks reached last April. This development may result in a modest increase in share prices at the beginning of the week. While it appears that Elliott does not yet possess a sufficient stake to compel a sale, a concrete offer for BP in the near future could potentially drive the stock price significantly higher.
6. BP releases Q4 results on Tuesday. The company has already signaled that these will be weak, and that share buybacks could be cut, the focus could be on how the executive team handles the earnings call now that Elliott is on the prowl. The CEO will also release a delayed strategy update on Feb 26th. The fact this was delayed already leaves a bad taste in the mouth of investors, but now there is even more resting on the new strategy. The question for investors, is Murray Auchincloss up to the task? If not, then the share price could fall, allowing Elliott to build an even bigger stake in the UK oil giant. This is an important few weeks for BP.
7. In the following section, we will examine significant economic events to monitor in the upcoming week:
   
   US CPI
   Attention will be focused on the Consumer Price Index (CPI) report scheduled for Tuesday, which will provide insights into inflation trends for January, particularly following an unexpected increase in US wage data. The average annual wage growth has risen to 4.1% year-over-year, up from 3.9% in December. Market analysts anticipate that the headline CPI will remain stable at 2.9%, while core price growth is expected to decrease slightly to 3.1% from 3.2%. There are notable risks for an upward surprise in January's CPI, attributed to the rise in wage growth and the increase in prices of essential commodities such as natural gas, heating oil, and gasoline observed last month. Additionally, the recent fires in Los Angeles may have exerted upward pressure on rental prices, potentially affecting the shelter index.
   
   Should the data align with market expectations, investors may overlook it, as this will be the final inflation report prior to the implementation of President Trump’s tariffs. These new tariffs are anticipated to exert downward pressure on inflation, particularly with the 10% tariff on Chinese imports now in effect, despite delays concerning tariffs on Canada and Mexico.
   
   This situation is creating a dual effect in the foreign exchange market. The US dollar is experiencing fluctuations due to safe-haven flows driven by tariff-related anxieties and geopolitical trade tensions, alongside concerns that these tariffs may elevate inflation and complicate the Federal Reserve's ability to expedite their rate-cutting strategy. The Fed is projected to implement slightly more than one rate cut this year, with interest rate expectations having been moderated since the payroll report released on Friday. A stronger CPI could perpetuate this trend, potentially increasing downward pressure on global risk assets, given that the Fed remains a pivotal central bank on the global stage. Furthermore, we will be attentive to Fed Chairman Powell’s semi-annual testimony before the US Congress, where he is likely to face rigorous questioning, particularly from Republican members. However, it is anticipated that he will maintain a cautious stance, as the Fed chair has indicated the necessity of assessing the effects of President Trump’s economic policies before drawing conclusions regarding their implications for monetary policy.
8. UK GDP
   
   The United Kingdom is anticipated to announce a 0.1% contraction in GDP for the last quarter when the figures are released on Thursday. This decline is widely expected following a series of disappointing economic indicators. It is projected that growth in the service sector has significantly slowed, while there may have been a slight improvement in manufacturing and industrial production. However, the service sector's substantial contribution to the UK economy means that its struggles could indicate a looming recession.
   
   Weak growth trends have persisted into 2025, with economic data consistently falling short of expectations. The Bank of England (BOE) significantly reduced its growth forecast during its recent meeting, cutting it by half, which was more drastic than anticipated. The ongoing deterioration in economic data for 2025 suggests that recovery may take longer than previously thought. The BOE anticipates an uptick in the UK economy during the latter half of this year, and it is unlikely that this data will alter their outlook.
   
   This situation places additional pressure on Chancellor Rachel Reeves as she approaches her Spring Statement next month. The economic stagnation may necessitate more substantial spending cuts in her interim update. To stimulate growth, she could consider tax reductions and reversing some of the tax increases from the October Budget. While such measures might enhance confidence, it is doubtful that her political base would support this approach. Consequently, the UK may need to find a way to achieve growth to escape the current stagflation scenario.
   
   A sharper-than-expected decline in GDP poses a risk to financial markets, potentially triggering another sell-off in UK bonds. This could exacerbate growth challenges, as increased interest payments on national debt may result in reduced government consumption. UK bond yields have remained stable thus far this year, with the 2-year yield decreasing by 20 basis points. Should bond vigilantes return to target the UK, it could further weaken the pound, pushing GBP/USD closer to the $1.20 mark.