Risk aversion is dominating global financial markets on the final day of the Year of the Dragon. A sell-off in AI stocks pummelled the Nasdaq Composite Index by 3.1% to 19342, near the level it ended at last year. The US Treasury 10Y yield fell 8.7 bps to 4.53%, its lowest level since December 30. The primary victims of risk aversion overnight were the commodity-led currencies, AUD (-0.3%), NZD (-0.3%), and CAD (-0.2%). WTI crude oil prices have declined by 8.6% from their mid-January peak (USD80/barrel) to 73.15, levels seen at the start of the year. The OIS market sees a 90% chance of a 25 bps cut to 3% in the Bank of Canada’s meeting tomorrow. Given the shift towards growth-focused rate cuts amid higher uncertainties by some central banks this month, the markets expect the RBA to look past Australia’s CPI inflation and join the global easing cycle in February.
Although the JPY (+1%) and the CHF (+0.4%) benefited as havens overnight, they are succumbing to a flight to the USD this morning. The Fed should resist pressure from US President Donald Trump to lower rates at tomorrow’s FOMC meeting. We expect the Fed to maintain its cautious approach to rate cuts by keeping rates unchanged at 4.25-4.50% after three consecutive cuts totalling 100 bps. The European Central Bank should maintain a dovish tilt after meeting market expectations for a 25 bps cut in its deposit facility rate to 2.75% on Thursday. The Trump-Colombia tariff spat also dampened the market’s hopes for a more gradual or measured approach to tariffs in Trump 2.0. Complacency regarding the upcoming tariffs on Canada, Mexico, and China on February 1 has lessened.
Given Asia’s interconnectedness with the global economy, we are seeing a negative spillover into Emerging Asian currencies this morning. The significance of the semiconductor industry to the South Korean and Malaysian economies should result in some profit-taking in this year’s top two performers – the KRW and the MYR. Expectations for the Reserve Bank of India to cut rates at its February 7 meeting increased after its announcement to boost liquidity in the banking system through bond purchases and USD/INR swaps. India’s foreign reserves have fallen 11.5% from its peak over the past 3.5 months, with the central bank open to the INR moving more flexibly with regional peers.
All said, market volatility is no excuse not to wish our Chinese readers a Happy Lunar Year! Wishing everyone a joyous and fulfilling Year of the Snake, filled with prosperity, good health, and endless success!
Quote of the Day
“You can’t go back to change the beginning, but you can start where you are and change the ending.”
C.S. Lewis
January 28 in history
In 1981, President Ronald Reagan lifted remaining domestic petroleum price and allocation controls in the US, helping to end the 1979 energy crisis and started the 1980s oil glut.
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