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London Quick Take – 21 Jan - Fresh highs for gold as Trump heads to Davos, European stocks steadier, US futures firmer after Dow sinks 800pts

Equities 5 minutes to read
Neil Wilson
Neil Wilson

Investor Content Strategist

Note: This is marketing material. This article is not investment advice, capital is at risk.

Maybe only the markets can stop Trump now?

Canadian PM Mark Carney referenced Thucydides yesterday – the strong do what they can, the weak suffer what they must. In many ways he’s right to invoke the Melian Dialogue ahead of talks over Greenland’s future taking place in Davos - it details talks where Athens demanded neutral Melos join its empire. Increasingly it feels we are in a world where great power rivalry means the strong grab resources and territory and economic might while the rest have to make do. We hear from Trump today as he flies to Davos, with Greenland dominating the WEF and talks scheduled with Europe's leaders. Trump was due to give his address at 2.30pm European time, but his plane is delayed by a about 3 hours, so now expected to talk around 4:30pm GMT.

So, what can Europe do? The only thing stronger and more intimidating than Trump is the US bond market. The interesting element to this is that market volatility may be just what’s required to talk Trump down – the bond market getting a bit ‘yippy’, as Trump put it, last year helped to persuade the president to backtrack on some of the more aggressive elements of his tariff programme. The bond market is perhaps that only thing that will stop Trump going all the way on Greenland. And, on that front, we see some serious threats emerging from the Japanese bond market meltdown spilling over into a broader 'sell America' trade.

Meanwhile, a Danish pension fund yesterday said it would offload £100mn in Treasury holdings, citing "poor government finances", but clearly Greenland made this decision somewhat easier. Weaponisation of Europe's $8tn holdings of US stocks and bonds has been dropped into conversation but it's less clear how you would actually coordinate this as a 'response' to the crisis. Nevertheless, markets are clearly moving ahead of an expected rotation out of US assets by investors. But we've been here before and seen US assets rally after the initial shock.

TACO? My assumption is that military action is not a hollow threat on Trump's part, but largely meaningless since Republican senators simply won’t allow it - ample evidence that there’s a strong majority to back a war powers act to block any action on Greenland. So, Europe can stand firm but the threat now is from tariffs and an economic war. Senators won’t mind if Trump secures Greenland via a deal that is based on economic strength. So, it’s the bond and stock markets that can contain the fallout from a full-blown economic and trade war. My gut is that Trump has overextended himself at last. Europe can hold the line and take the pain for a few months and let the bond market do the work.
Remember, there are key midterm elections this year. And to the extent that the wealth effect matters (and it does) and the extent that ‘the stock market is the economy’, he needs markets to be on side. A ruling on tariffs from the Supreme Court could come today, whilst the justices are set to hear arguments on Trump’s attempt to fire Fed governor Lisa Cook – an important test of Fed independence you feel.

Stocks fell yesterday but in Europe at least finished off the lows of the day. Market moves have been sharp but relatively shallow. The FTSE 100 finished down 1% or so and is now about 1.5% off its all-time high. Its defensive characteristics and weighting towards miners have helped. Defence names have also scored well this year though we saw some weakness here on Tuesday as selling was broader than on Monday, with some defensives like the tobacco stocks taking a hit. Losses have been steeper on the continent – more exposed to trade flows and tariff risk – with the DAX roughly 3% below its all-time high also struck in recent days.  European stock markets opened essentially flat on Wednesday with all eyes on Trump's Davos arrival. US Treasuries and the dollar were offered in what can be called a ‘sell America’ trade. Japan’s bond market could be more important right now than the geopolitics, but we are keeping a close eye on both as there is the potential for a drawdown in global liquidity and general derisking to stoke a meaningful stock market correction.

US stock markets suffered their worst session since October with the S&P 500 down over 2% and Nasdaq Composite off 2.4% as big tech led the declines. Nvidia and Tesla slumped more than 4%, Amazon & Apple –3% and Meta and Alphabet –2%. SPX closed below its 50-day moving average at 6,830, while NDX also closed down –2.1% to close below its 50-day line at 25,308. Netflix dipped after-hours – margin forecasts and cash required to do the WBD deal weighing. 

Big risk of topside breakout in US yields that reflects growth momentum (markets underpriced for 5% GDP this year) and renewed sell America trade as investors reduce exposure to fickle us economic policy... talk of weaponisation of European holdings of US Treasuries, a blowup in Japanese bond yields etc all playing into this. Still in long-term view of 4D trade – dollar debasement and debt devaluation. Plus now a new moron premium - ie top bond investors citing Trump's erratic policy moves and Fed independence risk. Treasury Secretary Scott Bessent said today that he is not concerned about the sell-off and has repeatedly cited the Japan move as the reason for selling.
 
Gold is the only real safe haven - it hit a fresh record high this morning with spot at $4,888/oz. The renewed U.S.–Europe standoff over Greenland has acted as a fresh catalyst for demand for gold and silver, reinforcing an already powerful hard-asset narrative. US Treasuries sold off sharply with the 10yr breaking out its range held since last August, moving past 4.20% to touch 4.30% before pulling back a touch this morning along with Japanese bond yields, which are a lot calmer overnight. The US 30yr is approaching 5%.
Sterling ticked up a few pips after inflation came in a tad warmer than expected at 3.4% vs f/c 3.3% and previous 3.2%. It looks a bit sticky but inflation is trending lower. The main risk is the jobs market. We've seen a material stepdown in inflation in the UK, which is no longer as much of an outlier compared with peers. It looks like we are heading to 2.5% inflation by end of the year and should be close to 2% target next year. Some Bank of England officials remain concerned about inflation but yesterday's wage and employment data suggest those fears are overdone. Sticky wage growth and services inflation are less of a problem as the jobs market cools. Payrolls are softening, unemployment is at a four-year high and inflation is coming down against a backdrop of a materially more challenging trade and geopolitical backdrop. In this environment I believe the BoE will cut rates further than markets have expected, even absent any major geopolitical or liquidity shocks, with an additional 75bps of cuts this year, taking the base rate down to 3.0%. 


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