With the latest inflation news coming in fairly tame last week, Treasury yields declined from 4.8% last Monday to 4.6% on Friday, which cleared the decks for the S&P 500 to gain nearly 3% last week, while turning investor focus on to the favorable earnings and guidance coming in from major banks. As a result, the long-awaited January Effect has finally begun. There is also a lot of excitement due to the “shock and awe” that Trump 2.0 is beginning to unleash. Since the U.S. dollar remains amazingly strong, the initial concerns that the Trump tariffs will be inflationary are ebbing, since a strong dollar lowers import costs.
Interestingly, the World Economic Forum in Davos, Switzerland is happening the same week that Donald Trump is sworn in as the 47th President of the U.S. President Trump will address the Davos Forum by long distance on Thursday, just three days after his inauguration. This will provide a fascinating chance to watch the reactions of the global elite since President Trump is expected to use this Forum as a chance to clarify his trade policies as well as address his proposed solutions to the war between Russia and Ukraine.
Here are the most important market news items and what this news means:
- The Trump wildcard is tariffs, namely, how many and how big? China is expected to be the biggest loser in the tariff rollout, but I suspect that our allies might scramble to “make a deal” if Trump implements tariffs with a specific deadline, such as February 1st. As I have repeatedly said, President Trump likes to use tariffs to make allies uncomfortable so he can negotiate from strength. So far, when the tariffs are rolled out has not been clarified, so perhaps President Trump wants to wisely commence negotiations with other countries before they commence. Interestingly, the British pound, Canadian dollar, Mexican peso, and euro were all down relative to the U.S. dollar based on tariff uncertainty.
- Speaking of February 1st, that is the day that 25% tariffs are set to be imposed on Canada and Mexico if undocumented migration and fentanyl flows are not stopped to the Trump Administration’s satisfaction. Naturally, there will be emergency delegations from both Canada and Mexico striving to appease the Trump Administration before February 1st. Although both Canada and Mexico have said they will retaliate against any tariffs, that is not the ideal solution since the Trump Administration simply does not care. In other words, I do not expect a Mexican standoff but instead complete surrender since, otherwise, the economic consequences are horrific for both Canada and Mexico. - One of President Trump’s executive orders withdrew the U.S. from the Paris Climate Accord. The reaction at the World Economic Forum was muted, probably because the right-wing political movement in Europe is fueled by high electricity prices, especially in Germany with the rising influence of the AfD party that wants to restart Germany’s nuclear reactors. Naturally, President Trump also signed “drill baby drill” executive orders to unleash more natural gas production and boost LNG shipments and crude oil exploration. Since Europe desperately needs U.S. LNG, there is virtually no criticism of “drill baby drill.” I should add that 6 U.S. LNG ships that normally supply southeast Asia were diverted to Europe due to higher prices for LNG.
- Speaking of Germany, the ZEW Indicator of Economic Sentiment, which tracks expectations for the next six months, collapsed over 5 points to 10.3 in January, which was well beyond economists’ consensus estimate of 15. So, to say the mood in Germany is dire after two consecutive years of economic contraction is a bit of an understatement. The German election in February may help to stop the negative sentiment, especially if the AfD party becomes part of the ruling coalition.
- The world’s largest auto manufacturer, Toyota, has selected Nvidia’s Orin chip to power its next generation of driver assist features. Orin is Nvidia’s solution for putting the computing power and intelligence of AI inside a car. The Orin system debuted in 2019 and has developed into a more all-encompassing solution over time. BYD, Mercedes-Benz, and many luxury EV makers have also adopted Orin. Although Orin does not yet offer full self-driving, like Tesla’s FSD system, when self-driving does arrive for BYD, Toyota, Mercedes-Benz, etc., I expect that Nvidia will naturally benefit.
In summary, the most important thing for investors is to monitor Treasury yields, the strength of the U.S. dollar, and a potential ceasefire between Russia and Ukraine. So far, the earnings season is going well, and with interest rates falling, the wind is at the back of equities. No one will be surprised if we are at new highs by the end of the earnings season.
