Monday's Markets Update (February 3, 2025)

04 Feb 2025 by rate3

On Monday, following a large downward gap opening, equities closed in the green after Trump delayed the introduction of tariffs. Nevertheless, threats of retaliation continue to loom over markets. The situation has been further complicated by the latest PMI data, which show manufacturing growth for the first time in two years, thereby strengthening the position of FOMC hawks. The dollar and oil prices oscillated widely due to Trump's change of mind regarding the timing of tariffs and his pressure on OPEC. Meanwhile, gold reached a new ATH on the market volatility, and EU inflation rose due to higher energy costs. Lumber and gas prices surged, having a strong correlation with imports from Canada and Mexico. BTC reclaimed the $100K level, while ETH rebounded to $3K after a sharp correction to $2,000, driven by rumors that some large, politically affiliated funds accumulated significant ETH holdings.

Details

The ISM Manufacturing PMI climbed to 50.9 in January, up from 49.2 in December, surpassing forecasts of 49.8 and marking the first expansion after 26 months of contraction. New orders, production, and employment rose, while inventories fell and price pressures increased. 1Y trend: "Up" (ISM)

Crypto

Trump's World Liberty Finance bought 86K ETH (worth $220M) in eight hours, raising its total ETH holdings to $420M. The purchase, made during a market downturn, has sparked speculation about strategic timing. ETH now represents 65% of its portfolio. (source)

World Markets

The Eurozone Manufacturing PMI for January rose to 46.6, beating the preliminary 46.1 and marking the slowest decline since May 2024. Output and new orders fell at the weakest pace since May, but job losses accelerated. Input costs rose for the first time since August 2024, while output prices remained unchanged. Business sentiment improved, with growth expectations at their highest since February 2022. 1Y trend: "Down" (SPG)
Euro Area inflation rose to 2.5% in January, up from 2.4% in December, exceeding expectations. Energy costs surged (1.8% vs 0.1%), while services (3.9%) and food (2.3%) inflation slowed. Core inflation held at 2.7%, its lowest since early 2022. 1Y trend: "Side" (Eurostat)

Currencies

The dollar index made a round trip from 108 to 110 and back to a two-week high, after Trump suddenly delayed Mexico tariffs by a month, easing fears of sweeping trade barriers. Trump's move supported G10 and emerging market currencies. Meanwhile, ISM data showed factory activity expanding for the first time in over two years, challenging expectations of Fed rate cuts. 1Y trend: "Up"
The South African rand fell 2% to around 19 per USD after Trump halted aid, citing unfair land confiscation and discrimination by Pretoria. South Africa downplayed the aid cuts, reaffirming land reforms and policy stability, while power outages continued to hinder economic growth. 1Y trend: "Side"

Commodities

Gold hit a new record $2,820 per ounce as trade uncertainty persisted. Trump delayed Mexico tariffs but imposed levies on China and Canada, fueling safe-haven demand. Markets expect two Fed rate cuts this year, while the BoC, ECB, and Riksbank also cut rates. 1Y trend: "Up"
WTI crude futures oscillated near $73 per barrel as OPEC+ confirmed gradual output hikes and dropped the EIA from its monitoring sources. Tensions with Trump, who urged OPEC to boost supply to counter high prices, persist. New tariffs added trade uncertainty. 1Y trend: "Side"
Lumber futures soared above $630 per thousand board feet, hitting a high since October 2022, after Trump imposed tariffs on Canada, a key wood supplier (30% of lumber). The 25% tariff, alongside existing 14.5% duties, pressures domestic supply. Meanwhile, expectations of Fed rate cuts eased mortgage rates below 7%, supporting construction demand. 1Y trend: "Up"
Natural gas futures surged 10%, recovering from last week's decline. The announcement of tariffs on Canadian and Mexican oil raised supply disruption concerns. Natural gas imports from Canada are expected to decline due to the tariffs. The EIA reported a significant gas withdrawal from storage due to extreme cold weather. 1Y trend: "Up"

Comment: What's Up With Trump's Tariffs?

Trade tariffs increase costs for businesses and consumers, often leading to market volatility. Export-reliant sectors like manufacturing, technology, and retail may face immediate declines. Over time, supply chain shifts, inflation, and reduced corporate margins can harm growth-oriented stocks. A prolonged trade war risks global economic slowdown and potential recession, pressuring equities further.

Winners may include domestic industries like healthcare, while export-heavy sectors and industries relying on imported materials could suffer. Investors may shift to safer markets, alternative assets, or automation-focused sectors. Long-term impacts include global supply chain decoupling, regional trade agreements, and emerging market growth as alternatives to China.

Bearish outcomes likely dominate, with reduced earnings and recession risks. However, domestic investments and technological adaptation could provide selective opportunities. Historical parallels like the Smoot-Hawley tariffs highlight significant risks, though fiscal measures might offset some effects. Strategic diversification and inflation-resistant assets can help mitigate potential losses.