Focus on new US administration

This week, the financial markets’ focus is on the initial measures and plans of the new US administration, rather than on economic data. The markets will keep at least one eye on all statements regarding US trade policy and potential tariffs. Whether justified or not will become clear in the coming months. On his first day in office, Trump did not follow through on his campaign threat of increased tariffs. Late that evening, he did announce the possibility of imposing  tariffs of 25 per cent on imports from Canada and Mexico starting 1 February, which he followed up one day later with the idea of additional 10 per cent tariffs on imports from China, also from 1 February.

Will Trump carry through on tariff threats?

Many market observers understood his statements to indicate the tariffs may still be avertible through negotiations. The fact that no tariffs have yet been explicitly mentioned for the EU or other countries and economic areas with a specific percentage rate and date was also seen as good news, as was the fact that a higher tariff rate has not been brought up for China. Only time will tell whether this optimism is justified. On Monday and Tuesday, at least part of the tariff risk premium that had been priced into many currencies was abandoned. The US dollar, in particular, lost ground, while the euro, which recently touched a two-year low against the US dollar, traded around 2.5 per cent higher over the course of the week than at this low.

Gold achieves weekly gain

Since high tariffs could mean higher inflation and thus also higher interest rates and yields, some of the risk premium was priced out, causing yields to drop moderately at the beginning of the week. Having already successfully and relatively effortlessly absorbed the previously very firm US dollar exchange rate and the unusually high level of yields, gold prices had an additional boost this week when the situation regarding currencies and yields reversed.

Last Thursday morning, gold traded at 2,703 US$ per ounce. After remaining above the 2,700 mark throughout Friday, it slipped briefly to around 2,690 on Monday morning at the start of trading but rose sharply to 2,763 late Wednesday morning. From there, it retreated somewhat to 2,755 US$ per ounce on Thursday morning.

Strong euro slightly dampens Xetra-Gold

The price of Xetra-Gold was also up this week, although the stronger euro has had a dampening effect. It rose from 84.35 € per gram on Thursday morning to 85.10 in the afternoon. On Monday, the stronger euro caused it to drop to 83.55, the weekly low, before it marked a weekly high of 85.25 on Wednesday. Xetra-Gold kicked off trading this morning at around 85.15 € per gram.

Today at 17:00 CET, President Trump will address the World Economic Forum in Davos via video link. Although important leading indicators such as the purchasing managers’ indices for the eurozone will be published tomorrow and the Fed as well as the ECB will meet next week, the markets are likely to remain primarily under the spell of announcements or decisions of the new US administration.

As we are already nearing the end of January, I wish all readers a relaxing weekend.