Morning Bid: Ducking for Cover as Trump Launches Trade War

As the sun rises on a new day, investors worldwide are bracing themselves for the potential fallout from President Donald Trump's latest trade moves. The U.S. President has issued a broad trade memo, signaling a more measured approach to tariffs, but the markets remain on edge as the new administration takes shape.



The U.S. stock and bond markets were closed for Martin Luther King Jr. Day on Monday, but FX markets were open, and the dollar's steep fall across the board reflected the relief among investors that Trump appears to be dialing down the tariff rhetoric. The dollar index slumped 1%, its biggest decline since August, as hedge funds reduced their net long dollar position to the lowest level since 2016.

However, the dollar may have been primed for a fall, going by hedge fund positioning. The latest Commodity Futures Trading Commission data shows funds last week held a net long dollar position against a range of currencies worth $35 billion, the biggest in nine years. The dollar had rallied around 10% since September alongside the surge in U.S. Treasury yields of more than 100 basis points, a tightening of financial conditions that hit Asian and emerging markets particularly hard. A pause or reversal should ease that squeeze.

U.S. stock futures are pointing to gains of around 0.4% on Wall Street on Tuesday. Asian markets were already on the front foot on Monday, with the MSCI Asia ex-Japan and Nikkei 225 indexes both rising more than 1%. Markets around the world will be sensitive to the deluge of headlines that's likely to flow from Washington in the coming days as the new administration announces policy directives and executive orders. It is shaping up to be a volatile week.

Cryptocurrencies, on the other hand, were more buoyant as the self-styled "crypto President" was sworn in and bitcoin leaped to a new high just shy of $110,000. The Asian economic calendar on Monday is light, with producer price inflation from South Korea and consumer price inflation from Hong Kong the only major economic indicators on tap. Expect markets to take their cue from headlines out of Washington, the upturn in global stocks, and the diving dollar.

In conclusion, investors should remain vigilant as the Trump administration takes shape and the potential impact of its trade policies unfolds. While the markets have shown resilience in the face of trade tensions thus far, the situation remains fluid, and investors should be prepared for increased volatility in the coming days and weeks. By staying informed and maintaining a diversified portfolio, investors can better navigate the uncertain waters ahead.