Market Overview: Reaction to Recent Global Developments

Markets are experiencing significant volatility in response to recent geopolitical and economic events. Equities and bonds have faced widespread selling pressure, while precious metals such as gold and silver have surged to record levels. Concurrently, the US dollar has come under heavy selling.

Geopolitical Influences

President Trump’s presence in Davos has intensified market dynamics, particularly regarding his persistent demand to acquire Greenland. He is leveraging diplomatic efforts to encourage international participation in overseeing Gaza’s reconstruction. US Treasury Secretary Bessent has publicly defended the Greenland acquisition initiative, despite the US previously acknowledging Danish sovereignty on two occasions. Bessent cautions that the market’s reaction is exaggerated, drawing parallels with the market behavior observed around ‘Liberation Day’ last April.

Asia-Pacific Political and Economic Update

In Japan, despite the merger of a former Liberal Democratic Party coalition partner with the largest opposition party, Prime Minister Takaichi has strengthened her position and is anticipated to retain leadership following the February 8 election. Her fiscal policy proposals have triggered a sharp rise in Japanese long-term government bond yields, increasing by 25 to 30 basis points. The Japanese yen is currently the weakest currency within the G10, depreciating approximately 0.25% versus the US dollar. Meanwhile, the Swiss franc leads appreciation among major currencies, gaining over 1%.

Currency Markets and Technical Developments

G10 Currencies

– **Euro:** The euro displayed a bullish outside day, trading above the highs recorded last Friday and settling higher. Continued buying activity has pushed the euro close to $1.1740. This move has achieved a technical retracement level stemming from losses incurred since Christmas Eve. Notably, options contracts amounting to €2.2 billion at the $1.17 strike are set to expire shortly. The next resistance target is identified near $1.1755.

– **US Dollar / Japanese Yen:** The dollar closed near session highs of JPY158.10, briefly reaching JPY158.60 before easing. US$800 million in options at the JPY158 strike expire today. The dollar dipped to JPY157.55 in European trading despite rising US 10-year yields. Contrary to speculation, no Japanese market intervention occurred during the US market holiday. The announcement of next month’s election provided support near JPY157.40, comfortably above the 20-day average near JPY157.20. The dollar has remained above this average since late December.

– **British Pound:** Sterling initially fell to approximately $1.3330 before rebounding above $1.3420, surpassing the pre-weekend high and generating a technically bullish outside day. Further gains saw the pound reaching $1.3490, followed by consolidation. Option-related purchases may have contributed, with nearly GBP335 million and GBP326 million in contracts at $1.3420 and $1.3485 respectively. Immediate support is noted in the $1.3450-60 range.

– **Canadian Dollar:** Canada’s headline inflation slightly exceeded expectations due to a federal tax holiday effect for late 2024, but core inflation averaged 2.6%, down from 2.8%. The Canadian dollar extended gains to its strongest level in three sessions. The US dollar declined to CAD1.3860 after nearly reaching CAD1.3930 before the weekend, with losses extending below last week’s low to near CAD1.3815. Support is identified between CAD1.3790 and CAD1.3800.

– **Australian Dollar:** The Australian dollar closed robustly above $0.6710 yesterday and reached almost $0.6750 today before entering a consolidation phase. The recent peak earlier this month stands just above $0.6765.

Emerging Market Currencies

– **Mexican Peso:** The peso recorded its sixth consecutive day of gains, with the dollar temporarily dropping below MXN17.60 for the first time since June 2024. The intraday low was just under MXN17.57. A retest of the MXN17.60 level was anticipated, with a subsequent target near MXN17.38. However, risk-off sentiment recently prompted a peso pullback, with the dollar recovering above MXN17.64.

– **Chinese Yuan:** The yuan continues a steady appreciation trend. The offshore yuan’s dollar-peg dipped below CNH6.9500, the lowest since May 2023. The People’s Bank of China set the official reference rate at CNY7.0006, down from CNY7.0051 the previous day. Year-to-date, the onshore yuan has appreciated by 0.40%, ranking second among Asian currencies, whereas most regional currencies including those of South Korea, Taiwan, and India have depreciated.

– **Indian Rupee:** The dollar slightly strengthened against the Indian rupee, reaching INR91.0650, narrowly below last month’s record high of INR91.0835. The Reserve Bank of India is believed to have intervened to temper volatility.

Equity and Fixed Income Markets

Equity indices face downward pressure across Asia-Pacific, with Taiwan as the exception. Europe’s Stoxx 600 is trading approximately 1.25% lower, marking a third consecutive session in decline amid ongoing downward momentum for the new year. US index futures similarly indicate losses between 1.5% and 2.0%.

Benchmark sovereign yields have risen notably. Japan’s 10-year yield increased by nine basis points, with longer maturities climbing more sharply—the 30-year Japanese Government Bond (JGB) yield surged nearly 27 basis points to 3.88%, and the 40-year yield rose approximately 30 basis points to 4.23%. European 10-year yields are mostly higher by 4 to 7 basis points, while the US 10-year Treasury yield rose seven basis points to nearly 4.29%, reaching its highest level since last September.

Commodity Markets

Gold has reached a new high near $4,737.55 per ounce, with silver also attaining record highs just above $95.50 per ounce. Meanwhile, March West Texas Intermediate (WTI) crude oil recovered from a five-day low near $58.50, advancing approximately $1 during European trading to surpass $60.

Economic Data Releases and Outlook

United States

The ADP employment report for late December will be released soon, with expectations compared to the prior reading of 11,750 jobs. The Philadelphia Federal Reserve will publish its January non-manufacturing survey, following December’s revised reading of -21.6 from -16.8. The broader Philadelphia Fed business outlook index improved markedly in the previous report, rising to 12.6 from a revised -8.8. Collectively, these indicators suggest the US economy ended the previous year on solid footing.

Eurozone

The eurozone current account surplus narrowed to €8.6 billion in November from €26.7 billion in October. For the first eleven months of 2024, the surplus averaged approximately €34.6 billion, decreasing to about €21.8 billion in the Jan-Nov 2025 period. Despite the decline, the surplus remains slightly above 2% of GDP (2.7% in 2024). Construction output in the euro area dropped 1.1% in November following a 1.7% increase in October. The fourth quarter of 2025 is projected to be the sole quarter showing growth in construction, likely supported by infrastructure investment initiatives. Germany’s ZEW survey revealed improved sentiment, with the current conditions indicator rising from -81.0 to -72.7 and the expectations component increasing from 45.8 to 59.6.

United Kingdom

The UK labor market showed modest improvement. Average weekly earnings strengthened in November, and employment increased by 62,000 (three-month rolling) after a 16,000 decline in October. However, payroll employment decreased by 43,000 in November. Jobless claims rose by 17,900 following a revised 3,300 decline in the preceding month. The International Labour Organization’s unemployment rate held steady at 5.1%. December’s Consumer Price Index (CPI) release, scheduled for tomorrow, is expected to confirm an inflation uptick toward year-end.

China

Consistent with forecasts, China maintained its one- and five-year loan prime rates at 3.0% and 3.5%, respectively.