The threat of an immediate transatlantic trade war has receded, replaced by a tentative sense of relief across global markets. President Trump’s call for “immediate negotiations” regarding the US purchase of Greenland has been interpreted by investors as a step back from his ultimatum of 10% tariffs on European goods.
While the geopolitical ambition remains, the shift from imminent economic punishment to diplomatic dialogue has allowed the “panic premium” to drain out of equities and safe-haven assets this morning.
With the immediate tariff threat sidelined, the market’s focus has snapped back to the diverging fortunes of the major economies. In the eurozone, the mood is darkening, the European Central Bank (ECB) published the minutes from its December, revealing some concern about economic stagnation but no imminent interest rate move.
Dovish signals from Frankfurt stands in sharp contrast to the news from London, where inflation’s rise to 3.4% in December and this morning’s surprising rise in retail sales in December has meant traders aggressively repricing their expectations and pushing back the likely timing of the next UK rate cut until the summer.
Meanwhile, the US economy continues to grow fast. Jobless claims data released yesterday showed a labour market in strong health, while yesterday’s final GDP data shows growth of 4.4%. The dollar, which had slipped on the geopolitical de-escalation, is finding fresh support from this economic resilience.
Markets are now in a holding pattern, waiting to see what today’s PMI data holds.
One to watch over the weekend for sterling, whether the resignation as MP of a key ally opens the door for a leadership challenge to the Prime Minister from Manchester mayor Andy Burnham, or whether the Labour leadership can defuse the threat via procedural barriers.
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