Donald Trump began his second term in the Oval Office and with it came a flurry of executive action. The markets may have been anticipating some more aggressive action on the tariff front, but instead didn’t really see a whole lot of action. The idea of 10% tariffs to China and 25% to Canada and Mexico are still on the table, but it looks like they won’t get implemented for at least another week or longer. As a result, market volatility was relatively tepid and the major averages were able to tack on modest gains.
Trump’s tone, however, was very clear. He wants global manufacturing to happen in the United States. Otherwise, expect tariffs. He also targeted energy prices & interest rates and, while those things won’t drop on demand, it does likely set up some future confrontations with world governments, OPEC and the Fed. The one consistent thing about Trump both in his first time and in the early days of his second term is volatility through policy rhetoric. The markets have regularly moved up and down based on whatever comments he made in the moment regarding trade policy. It looks like we’re heading down that road again. His stance towards China is perhaps the most consequential and most uncertain. Tariff threats have ranged from 10% to 100% and, while it sounds like he’s taking a softer tone now, I’d expect it to change regularly over time.
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The Bank of Japan hiked its benchmark rate by another quarter-point, a move which had been increasingly priced in over the past couple weeks. The dollar/yen remains volatile, but is still largely holding in its range for now. Given that the BoJ both warned on inflation and signaled further potential rate hikes ahead, I think the pressure is going to be on the yen to strengthen as monetary conditions tighten. The initial reaction to this hike has been modest so far, but the risk hasn’t gone away.
It’s worth mentioning that all the buzz around DeepSeek, the Chinese answer to ChatGPT, which supposedly works nearly just as well at a fraction of the cost, could be the black swan for the markets. The Stargate project was launched in part to assert the United States’ global AI dominance and prevent China from taking the lead. If China already has the lead and is able to develop comparable AI products with cheaper, less dynamic chips and other inputs, it could result in a radical change in market perceptions. This coming week could be really interesting if awareness really picks up.
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