Gold surged past $5,000/oz, silver approached $110 and the dollar was roundly offered as the relentless quest for hard assets continued amid yet more talk of tariffs and US government shutdowns, whilst talk of potential intervention in the yen rattled FX markets to send the dollar sharply lower to lend some extra support to gold and silver. More broadly, the rally in gold won't quit because it's about much bigger things that a few bps of inflation or GDP - it's about geopolitical ground shifts - Trump's remodelling of the world order and the shift from rules to power; economic policy uncertainty with tariffs and trade as the sinews of Trump's economic statecraft, fiscal profligacy as debts keep rising around the world and doubts about monetary policy backing for sound money as an era of fiscal dominance arrives at the Fed. Fiscal profligacy is on show everywhere – the US, UK and Japan are all showing it up in different ways this morning. European stock markets were kind of mixed to flat early doors Monday as we have a bit of push and pull within sectors, with more export/trade exposed shares under a bit of pressure and miners flying.
The odds of a government shutdown in the US by 31 January jumped over the weekend following the killing by Federal agents on a man in Minneapolis. Senate Democrats said they would oppose a deal that includes funding the Department of Homeland Security. It's now odds-on for at least a partial shutdown by the end of the week. There is a risk of further loss of confidence in the US fiscal position, creating a period of market instability.
Fresh trade spats between the US and Canada also sent investors looking for cover. President Trump threatened 100% tariffs on Canada should it strike a trade deal with China. “China will eat Canada alive, completely devour it, including the destruction of their businesses, social fabric, and general way of life,” Trump posted on his Truth Social platform. “If Canada makes a deal with China, it will immediately be hit with a 100% Tariff against all Canadian goods and products coming into the [US].” Greenland is out of focus for the moment but we can't rest easy. Another round of Ukraine-Russia talks are set for 1 February, after two days of talks over the weekend ended with waves of Russian air strikes on Ukraine's energy infrastructure. Oil prices were lower as Opec is set to keep oil production steady next month, while Trump boasted the US had taken the oil from seized Venezuelan tankers.
The Fed meets this week but is expected to leave rates on hold, likely attracting more ire from Trump. Data showed the US economy expanded revised 4.4% pace in Q3 2025, while core PCE inflation rose slightly to 2.8% year-on-year in November. The Atlanta Fed estimates Q4 growth at 5.4%...not the conditions that merit further rate cuts. But if Trump gets control of the Fed we could be looking at more cuts and a ‘run it hot’ policy shift to lower debt servicing costs for the government. This would force up inflation expectations and longer-dated bond yields, which could threaten the perfect scenario markets see of rising growth, looser financial conditions and disinflation. The move in gold and silver is all 4D – dollar devaluation and debt debasement.
Japan’s yen surged against the US dollar on intervention risks with chatter about the NY Fed conducting rate checks, a potential precursor or signal to full-blown intervention. Prime minister Sanae Takaichi, who dissolved parliament on Friday ahead of a snap election on 8 February she called, promised on Sunday to intervene in “speculative or very abnormal moves” in the Japanese yen and government bonds. A brutal selloff in Japanese government bonds was sparked last week after Takaichi’s suggestion that she would cut consumption tax for two years, a fiscal easing worth about 0.7%, on top of the 3% of GDP in fiscal expansion already announced. There are clearly two-way risks for the yen from here. USDJPY plummeted Friday from above 159 to 155 and extended the run lower this morning to trade around 1.53.50.
Sterling trades at a four-month high against the weaker US dollar, but the pound has barely budged against the euro, which has risen above 1.18 to keep a four-month high as well. Keep your eyes on the Labour leadership battle that is slowly unfolding. The party blocked Greater Manchester Mayor Andy Burnham's bid to become an MP by standing in the by-election in Gorton and Denton. Prime minister Starmer – already deeply unpopular with the public – is now facing a backlash from his own party for what’s seen as a stitch-up to keep out Burnham. The risk of a change of leadership is probably what’s preventing the market pricing in a few more rate cuts by the Bank of England as it would change the fiscal position back to higher spending, looser fiscal rules. As noted last week, gilts have enjoyed a strong rally of late that partially reflects greater market confidence in the UK’s fiscal position. But this is hard-won, and bond vigilantes will be swift to punish the UK veering off path. There is a high barrier for Burnham to become PM but I don' think this is the last of the matter.
It's a huge week for earnings on Wall Street and in Europe. The Magnificent 7 begin with earnings updates from Microsoft, Apple, Meta and Tesla; Lloyds is the highlight in the UK and luxury stocks including LVMH are among the European firms reporting.
