Morning Report
Today's economic developments and market movements.
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Key themes: New information on President Trump’s considerations around tariffs remain a key driver behind recent market moves across equities, bonds and commodities.
President Trump announced a large investment package into artificial intelligence, which alongside solid earnings reports, drove gains in US equities.
In response to the uncertainty surrounding tarrifs, Chineseauthorities announced new measures aimed at supporting its equity markets.
The DXY slid through its 108 support level intraday, before making up ground. Movements across the G10 currencies were mixed.
Bond yields were generally higher across developed markets.
Share markets: US equities continued to rally overnight – briefly reaching a historic intraday high – supported by a combination of solid earnings results and growing appetite for tech. The S&P 500 finished the session 0.7% higher; meanwhile, the Dow Jones was a little softer (0.3%) and the tech-heavy NASDAQ outperformed with a 1.2% gain, likely in response to President Trump’s announcement of a massive $500bn joint investment package into an artificial intelligence project.
The Euro Stoxx 50 finished 0.8% higher overnight, while London’s FTSE 100 was virtually unchanged through the session. Stocks were mixed across Asia, with a solid gain in Tokyo (+1.6%) and declines recorded across Hong Kong (–1.6%) and Shanghai (–0.9%), the latter two highlighting a clear risk-off sentiment amid uncertainty around Trump tariffs despite the announcement from Chinese authorities to implement various measures to support its stock market.
Following the rally in US stocks, momentum in the ASX 200 has sustained over the week thus far, posting a further 0.3% rise yesterday. Performances were varied across sectors, with information technology being the clear stand-out (+2.4%), while industrials and utilities followed behind. Futures markets are pointing to a weaker opening this morning.
Interest rates: Global yields generally moved higher overnight as President Trump vowed to impose tariffs on the European Union, leaving markets concerned over the policy’s inflationary impacts. US yields were higher across the curve, with the 2-year and 10-year treasury yields rising 2 basis points to 4.30% and 4.60%, respectively. Markets are pricing in a near-zero chance of a rate cut next week, and only a cumulative 39bps by year-end.
Yields in Europe and the UK were also higher across the curve, both the 2-year Bund and Gilt yields were up 2 basis points, while the 10-year Bund rose 2 basis points and the 10-year Gilt rose 4 basis points.
Australian bond markets followed the wider trend selling off marginally overnight, with both the 3-year and 10-year (futures) yields up 2 basis points to 3.93% and 4.51%, respectively. Markets continue to price in a circa 70% chance of a rate cut in February and nearly three cuts over 2025.
Foreign exchange: It was a relatively mixed day for the US dollar. The DXY traded between a key level of 108.00 and up to 108.20 through the Asian session before selling off just prior to the New York open, sinking to 107.80. The DXY managed to regain lost ground and finish at 108.17 at the time of writing.
Once again, the Aussie dollar held broadly flat against the greenback, finishing at 0.6277, though that was despite the rally to circa 0.6290 overnight – the highest read since the brief stint to 0.63 on January 6 during thin new-year trading. Despite more comments from President Trump indicating an intention to extend tariffs onto the European Union, the Euro managed to hold its ground, EUR/USD falling –0.1%; although markets are almost fully convinced of a near-term rate cut from the ECB, comments from officials in the lead-up to next week’s policy decision looked to provide somewhat of an offset. The CAD also continued to weaken against the backdrop of tariff announcements and a softer inflation read.
The USD appreciated heavily against the Japanese Yen ahead of the Bank of Japan’s policy meeting later this week, the USD/JPY rising from roughly 155.50 to 156.50.
Commodities: Brent crude oil prices slipped further –0.4% as markets continue to digest the implications of Trump’s proposed tariffs on China and Europe amidst emerging signs of tightness in the physical market following US sanctions on Russian vessels.
Metals continue to generally trend lower on the back of negative sentiment around tariffs with nickel down –0.2% and aluminium a further –0.5%, although copper managed to eke out a gain of just 0.1%.
Iron ore also fell –1.1%; with Lunar New Year approaching, liquidity in the spot market has diminished notably, adding to the softer price action. Gold was meanwhile up 0.4% to US$2755.12.
Australia: The six-month annualised growth rate in the Westpac–Melbourne Institute Leading Index, which indicates the likely pace of economic activity relative to trend three to nine months into the future, stayed in positive territory in December, albeit easing a touch to 0.25% from 0.33% in November.
The latest Index growth rate points to a lift in momentum over the first half of 2025. Westpac expects GDP growth to show a gradual improvement over the course of 2025, reaching 2.2%yr by year-end, a material improvement on the dismal 0.8%yr pace seen over the year to September 2024 but still a lacklustre result.
New Zealand: Q4 CPI was broadly as the market expected, rising 0.5% (2.2%yr). The largest contributors to this increase were: travel and accommodation costs, insurance premiums and housing costs. While the headline result was slightly above the RBNZ’s latest published forecasts from November, measures of core inflation and domestic (non-tradables) inflation continues to gradually ease towards the RBNZ’s target range, providing a constructive signal for policymakers. Against the backdrop of weaker economic growth, markets continue to price in a 50bp rate cut in February.
China: Authorities announced a number of additional measures to support its equity market. It is being reported that the policy adjustments seek to promote equity investment by institutional investors and share buybacks by corporates, with the help of the central bank’s lending vehicle, and to attract more retail investors into the equity market through new mutual fund issuance. These announcements follow President Trump’s reference to a potential 10% tariff on China, currently being discussed by the administration. While the proposed initiatives are more relevant for the medium-term, the timing of the announcements suggest authorities are keen to promote stability in the near term and take advantage of coming stimulus initiatives to rebuild household wealth through 2025.
United States: The leading index fell from +0.4% in November to –0.1% in December. It looks as though November’s positive reading was the anomaly, given the index has been negative for nine out of the past ten months, with the latest outcome being in line with the average over March to October.
Talks about tariffs continue to dominate headlines – the latest, but still unconfirmed, details suggesting President Trump is considering a 10% tariff on China (with a potential start date of February 1), in addition to 25% tariffs against Canada and Mexico and potentially further tariffs on the European Union. President Trump also announced a $500bn joint investment package – in collaboration with Softbank, Oracle and OpenAI – into an artificial intelligence project named “Stargate”, aimed at creating US-based AI infrastructure.
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