Political Headlines to Drive Markets

STOCK INDEX FUTURES

The indexes turned higher as President Trump offered remarks at the World Economic Forum in Davos. The president did note that the US would not take Greenland by force, after recent rhetoric made the administrations intentions unclear. President Trump’s renewed tariff threats against European allies prompted a repeat of the “Sell America” trade. Trump warned that eight NATO members, namely Denmark, Norway, Sweden, Finland, Germany, the UK, France and the Netherlands, could face a 10% tariff beginning February 1, which could rise to 25% on June 1 unless a deal for Greenland is reached. On the corporate front, Netflix fell in premarket trading after the streaming giant’s quarterly results left investors unimpressed. J&J fell 1% despite issuing a higher guidance. On the other hand, United Airlines was due for a stronger open after its results.

CURRENCY FUTURES

US DOLLAR: The USD index fell lower ahead of remarks from President Trump at Davos, after his latest tariff threats triggered a broad selloff in US assets. The European Union signaled it could impose tariffs on $93 billion of US goods, while France reportedly urged the bloc to deploy its Anti-Coercion Instrument. Trump told reports that he thinks the US and NATO will reach an agreement on Greenland while he is at Davos. Tariff threats have had a marginal effect on the dollar in previous events since the Trump administration gained power. However, a major escalation with NATO allies is likely to sting harder if no resolution or agreement is made. Looking ahead, PCE inflation figures for November will be released Thursday. PCE inflation is the Federal Reserve’s preferred measure of inflation and will be closely watched, particularly after recent jobs data showed an drop in the unemployment rate.

EURO: The euro is higher against the dollar as geopolitical concerns continue to weigh on the dollar, while Germany saw some positive economic data on Tuesday as markets await updates out of Switzerland. President Trump threatened several European allies with 10% tariffs until a deal for Greenland is reached, while the EU is considering broad retaliatory measures, including tariffs of up to €93 billion on US goods. Trump suggested Europe would be unlikely to “push back too much” as global leaders gather in Davos. It is a relatively quiet week on the data front, so political headlines are likely to shape price movements for the euro. On the data front, Germany’s ZEW Economic Sentiment Index jumped to 59.6 in January, its highest since July 2021 and well above forecasts of 50, signaling optimism for a 2026 economic turnaround despite uncertainties surrounding US trade policy.

BRITISH POUND: The pound is little changed against the dollar after data showed inflation picked up more than expected in December, which could lower the chances of more aggressive rate cuts from the Bank of England this year. Prices rose 3.4% on the year in December, above forecasts of a reading of 3.2%. Despite the hot reading, inflationary pressures are expected to subside throughout the year as an easing in wage growth and a weakening labor market should alleviate price pressures. BoE governor Andrew Bailey said he expects inflation to fall to 2% in April or May. The data comes after UK jobs data released on Tuesday showed unemployment stabilized near a five-year high, while the number of workers on payroll dropped by the most in over five years. However, in a positive for officials at the BoE, the jobs report showed that redundancies fell, while vacancies and the unemployment rate stabilized, along with the inactivity rate falling. Annual pay growth in the private sector excluding bonuses, a closely watched metric by the BoE, slowed to 3.6% in the three months to November, its slowest rise since November 2020, from 3.9% in the three months to October. The easing in wage growth is likely to assuage some fears over persistent inflationary pressures as the bank looks to cut rates again sometime in 2026.

JAPANESE YEN: The yen gained against the dollar, finding support amid the geopolitical tensions in Europe after facing its own selloff in recent days after Prime Minister Sanae Takaichi on Monday called snap elections for February 8 and pledged measures to loosen fiscal policy. The move has unnerved investors in Japanese sovereign bonds about the country’s fragile public finances, although bonds have recovered slightly from there selloff on Tuesday. Takaichi’s proposal to cut the 8% sales tax on food furthered concerns about the fiscal outlook as it remains unclear how the government will make up for the lost revenue. Traders are also focused on the Bank of Japan’s policy meeting this week, though rates are expected to stay on hold following a hike in December. Traders will watch for any hawkish signals from Governor Ueda as speculation rises that the next hike from the bank could come at its June meeting. Focus will also be on the central bank’s quarterly outlook report, where it will give its latest growth and price forecasts. Traders continue to watch for signs of a potential yen intervention amid worries about the impact of a weaker currency on domestic inflation.

AUSTRALIAN DOLLAR: The Aussie is higher, nearing a two-week high, as rising geopolitical tensions continued to weigh on the US dollar, while investors await upcoming local jobs data this week. Sentiment was aided by strong demand for the government’s sale of A$15 billion ($10.10 billion) in new 2037 Treasury bonds, which drew bids worth almost A$67 billion. Domestic data makes a return on Thursday with a jobs report for December due. Median forecasts are for a rebound of 30,000 in employment, following a surprise 21,300 drop in November. The jobless rate is seen edging up to 4.4%, from 4.3%, which would be dead in line with the Reserve Bank of Australia’s own forecasts. On Monetary policy, the Reserve Bank of Australia is expected to remain patient, potentially delaying any policy moves until more data paints a clearer picture on prices. Recent data showed that Australia’s Monthly Inflation Gauge, compiled by the Melbourne Institute, rose 1% month-on-month in December 2025, the fastest pace since December 2023 and accelerating from the 0.3% gains recorded over the previous two months. However, the RBA prefers quarterly data over the monthly gauge, which will come later in the month.

INTEREST RATE MARKET FUTURES

Yields slipped lower across the curve, making a partial recovery from yesterday’s global bond selloff initially triggered by developments in the Japanese market, as President Trump makes his remarks at Davos. President Trump’s threats to impose tariffs on major US allies over Greenland triggered a selloff in US assets, which saw the 10-year yield jump to a local high of 4.29%, last seen in August. Attention is also focused on the Supreme Court, where the court is also set to hear arguments over whether or not the president can fire Governor Cook. No president had attempted to remove a Fed governor in the central bank’s 112-year history until Trump tried to fire Cook last August. Fed Chair Powell is planning on attending the hearing, a move which some have taken as a possible sign that Powell could could stay in his role as a Fed governor even after his term as Chair ends. If Powell decides to stay on the Fed, his term would end in 2028.

Inflation data out Thursday will be important for interest rate expectations following December’s payrolls data, which reflected a stable labor market. Money markets currently price in a rate cut in July and are favorable of an earlier move in June

The spread between the two- and 10-year yields is 69.50 bps, while the two-year yield, which reflects short-term interest rate expectations, is 3.582%.

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