The Commodities Feed: Retaliatory Tariffs Vs Iranian Sanction Risk

Economic

Summary:

It was a session of two halves for oil yesterday with prices initially weaker on the back of China’s retaliatory tariffs against the US. However, a tougher US stance on Iran saw the market claw back these losses later in the session.

Energy – China retaliatory tariffs

There were two key factors influencing oil prices yesterday, firstly downward pressure came from China announcing retaliatory tariffs against the US, which included targeting US energy flows. However, countering this later in the session was President Trump signing a directive to increase economic pressure on Iran by enforcing sanctions more strictly and so putting a large share of Iranian oil exports at risk.

On China’s retaliatory tariffs, US crude oil and LNG were included, with a 10% and 15% tariff, respectively. However, with these tariffs only coming into force on 10 February, there is still room for a deal, although there are reports that President Trump is in no rush to talk to President Xi. The tariffs on oil and LNG affect a relatively small share of Chinese imports. In 2024, of the 11.11m b/d of crude oil imported, only 1.7% came from the US. For LNG, of the 105bcm imported last year, 5.6% came from the US. Therefore, while not great for broader sentiment, it is something that oil and gas markets will be able to cope with fairly easily.

On the more bullish side for crude and as reflected in the price action during the latter part of yesterday’s trading session, was President Trump’s directive to increase economic pressure on Iran. This move shouldn’t come as too much of a surprise given that President Trump was hawkish towards Iran during his first term and reimposed oil sanctions against Iran back then. These sanctions were never lifted by Biden, but they were not enforced strictly, particularly after Russia invaded Ukraine. Therefore, stricter enforcement could see as much as 1m b/d of supply at risk. However, reduced flows from Iran will not help in lowering oil prices, something that President Trump is very keen to achieve. He would need to see OPEC increase oil output (something he has already called for) to offset any potential Iranian losses. However, convincing the Saudis and other members to increase output may prove difficult at current price levels.

Overnight, API numbers showed that US crude oil inventories increased by 5m barrels over the last week, above the roughly 2m barrels build the market was expecting. In addition, gasoline inventories increased by 5.4m barrels, while distillate stocks fell by 7m barrels. The more widely followed EIA inventory report will be released later today.

Moving to European gas, TTF prices settled 3.25% lower yesterday following China’s retaliatory tariffs on US LNG. The market remains relatively nervous over storage levels and the bigger job Europe will face to refill storage over the injection season. However, one would expect the market to face some resistance around current levels (in the absence of any supply shocks). Gas is deep in the coal switching range, even when considering the recent strength in EUA prices. Furthermore, the investment fund long in TTF seems fairly stretched and so the appetite for speculators to increase this significantly more (in the absence of a bullish catalyst) is likely limited.

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Cohen

Economic

USD/INR holds ground amid rising trade tensions between the US and China.

India HSBC Composite Purchasing Managers’ Index fell to a 14-month low of 57.7, from the previous 59.2 reading.

Traders await Friday’s US Nonfarm Payrolls, which is expected a slight slowdown in job creation for January.

USD/INR continues its upward momentum for the fourth consecutive day, trading around 87.10 during Wednesday’s Asian session. The risk-sensitive Indian Rupee (INR) remains under pressure due to increased risk aversion following rising trade tensions between the US and China.

On the economic front, the seasonally adjusted India HSBC Composite Purchasing Managers’ Index (PMI) dropped from 59.2 in December to a 14-month low of 57.7. Despite the decline, the reading remains above the long-term average, signaling continued economic expansion. Meanwhile, the Services PMI registered at 56.5 in January, reflecting strong growth, though it slipped from 59.3 in December to its lowest level since November 2022.

In response to the new 10% US tariff that took effect on Tuesday, China imposed a 15% tariff on US coal and liquefied natural gas (LNG) imports, along with an additional 10% tariff on crude oil, farm equipment, and certain automobiles.

Despite the escalating trade dispute between the United States and China, traders remain hopeful for a potential resolution, similar to the agreements reached with Mexico and Canada. US President Donald Trump stated on Monday that he expects to speak with China soon but warned, “If we can't reach a deal with China, the tariffs will be very, very substantial.” However, no further developments have been reported.

Meanwhile, investors anticipate a 25-basis-point rate cut in the Reserve Bank of India's (RBI) upcoming monetary policy meeting on Friday, amid slowing economic growth. Market optimism has been further buoyed by expectations following the FY2026 Budget.

Looking ahead, traders await Friday’s US Nonfarm Payrolls (NFP) report, which is expected to influence the Federal Reserve’s (Fed) monetary policy direction. Consensus estimates suggest a slight slowdown in job creation for January 2025.

Economic Indicator

HSBC Composite PMI

The Composite Purchasing Managers Index (PMI), released on a monthly basis by S&P Global and HSBC Bank, is a leading indicator gauging business activity in India This d by weighting together comparable manufacturing and services indices using official manufacturing and services annual value added. The index varies between 0 and 100, with levels of 50.0 signaling no change over the previous month. A reading above 50 indicates that the Indian private economy is generally expanding, a bullish sign for the Indian Rupee (INR). Meanwhile, a reading below 50 signals that the activity is generally declining, which is seen as bearish for INR.

Source: FXSTREET

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Cohen

Economic

The saying comes from a Chinese folktale about a street performer whose dancing monkey refuses to perform one day. After slaughtering a live chicken in front of the monkey, the performer never has trouble getting him to dance again.

Canada and Mexico are this week’s chickens. But while China is the most obvious monkey (notwithstanding a modest 10% tariff on Chinese imports for now), there are other potential targets in Trump’s effort to make America great again. It’s a strategy that’s literally designed to leave blood on the ground.

Amid the unravelling of the post-war global order, however, this is still a president who likes deals, which means there’s upside opportunity for investors if he delivers even limited agreements that reduce any of the top sources of geopolitical tension. Even so, the question will remain whether his approach delivers more systemic damage than lasting benefits.

Sticking with the vivid metaphor, let’s set aside the fact that the chickens being punished are two of America’s most important trading partners. Let’s also ignore the sham that there are any serious talks underway to negotiate better fentanyl or border controls. Finally, let’s even gloss over the giant hole this blows in the US-Mexico-Canada Agreement that Trump himself endorsed in his first term.

A president who slaughters friendly livestock in his first two weeks just might provoke change that shapes some of what really does impact investor confidence, including all the things going wrong with China, Russia and the Middle East. There’s surely no straightforward path to resolving the geopolitical struggle with Beijing, restoring stability for Israel and its neighbours or delivering peace and security to Ukraine. But lopping off a few heads might just make some progress.

China is the real target

We know that Trump relishes a tough negotiation and delights in announcing maximalist demands that are unrealistic, illegal or outrageous. But the point of these tactics seems to be testing just how far out he can anchor a negotiation before the first serious discussions begin. After a few days or weeks, these tariffs may just exact a few concessions from Canada and Mexico on the avocado or softwood lumber trades, but neither Ottawa nor Mexico City are the real targets.

The main negotiation is clearly with China. Washington and Beijing have struggled to agree rules of superpower engagement, whether on the future of Taiwan, China’s massive trade surplus or rising risks in the South China Sea. A burn-the-barn-down tariff strategy, however, might just nudge Chinese leaders to seal a second phase of Trump’s long-ago ‘Phase One’ trade deal, in which China will stimulate its domestic demand and buy more US exports. Tariffs on Chinese steel or pharmaceuticals might remain, but even a limited trade truce would bring welcome clarity to the world’s largest bilateral economic relationship.

Moving on to the Middle East, it’s not hard to predict the region will be a source of global instability for decades ahead, but the current shifts in regional power offer the prospect for creative diplomacy. With the fighting stopped in Gaza, is there now a fresh opening for Saudi Arabia to recognise Israel? With Iran’s proxy militias having been roundly defeated and its economy in collapse, could the government agree to a freeze on nuclear weapons development in return for an end to western sanctions and a pledge to renounce regime change?

Finally, neither Ukraine nor Russia feels ready to make substantial compromises and it remains fiendishly complicated to find a balance that gives either side a sense of security without the other feeling threatened. And as much as President Vladimir Putin may want a cease fire to give his troops and Russia’s economy some relief, he also knows that Trump may want it even more having made it a persistent campaign promise. But Trump may still be able to drive a resolution that freezes Putin’s current territorial holdings in Ukraine in return for the US lifting sanctions on Russian oil exports.

Each of these deals is fiendishly difficult and even someone as lucky as Trump won’t deliver on all three. Still, if his trade strategy looks chaotic and unpredictable today, his bare-knuckle tactics might just deliver a new trading relationship with China, a calmer Middle East or global oil markets that benefit again from Russian production.

Investors will track any progress for these potential developments and assess what they may mean temporarily for higher asset prices. The rest of us will be left to wonder if any of it was worth the poultry carnage left behind.

Source：omfif

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Justin

Forex

Economic

French governor Villeroy de Galhau sounds positive note on inflation

An American inflationary upsurge and severe restrictions on world trade could produce an unpalatable mix of euro depreciation and a revival of price pressures amid further economic stagnation.

The US measures against Canada, Mexico and China could disrupt the European Central Bank’s campaign to ease monetary policy, lowering further already slender chances of a decisive European recovery from the second half of the year onwards.

Trump’s effective declaration of a trade war counters the impact of relatively good news on the inflation front expounded on 31 January by François Villeroy de Galhau, governor of the Banque de France, at an OMFIF meeting organised at State Street Global Advisors’ London headquarters.

He declared his support for ‘agile pragmatism’ in adjusting monetary policy as ‘victory over inflation is now in sight’. He outlined the chances for fresh interest rate cuts if, as expected, European inflation (at present around 2.4%) falls to the 2% target by the summer.

‘The direction of the travel is clear: our monetary policy will go from restrictive towards neutral… We should be sustainably around our 2% inflation target by this summer.’

Germany heads to the polls

All eyes are on the political position in Berlin as Germany prepares for a landmark election on 23 February. Friedrich Merz, leader of the Christian Democratic Union, the probable new chancellor, will face difficulties in putting together a workable coalition. He is under pressure both in Germany and internationally to reform the constitutionally anchored ‘debt brake’, which puts a cap on new public sector borrowing.

The need for a German and European fiscal stimulus has been increased by worries over a further dent to European growth in the light of Trump’s tariffs. The Bundesbank has been working behind the scenes on a potentially constructive compromise solution.

But the chances of reaching an effective political consensus for a constitutional change have been impaired by infighting between the different parties likely to be part of his new coalition. These include the Social Democratic party, Greens and liberal Free Democrats – all part of the ill-fated ‘traffic light’ coalition of Chancellor Olaf Scholz, which collapsed in November.

The strong opinion poll performance of the anti-immigration, anti-euro far-right party Alternative for Germany (AfD), at present polling second after the CDU, greatly complicates the parliamentary arithmetic needed for a consensus on Germany’s future fiscal policies.

‘Everybody loses in this kind of protectionist trade war’

Speaking on French radio on 3 February, Villeroy de Galhau referred to better news on inflation. ‘Looking at the economic news, there are some rather positive elements, there is a recovery of purchasing power… however, the decision of Mr Trump to impose strong tariffs will increase economic uncertainty.’

He said Trump’s tariffs were ‘very brutal’ and would especially hit the motor vehicles sector. ‘Everybody loses in this kind of protectionist trade war.’

At the 31 January London meeting, the governor’s speech focused on the rise of long-term yields in the US and the euro area (though to a smaller degree in the latter) since the start of monetary easing cycles in both economies. He dismissed the notion that the unwinding of quantitative easing has driven up long-term yields, as quantitative tightening is passive, bounded and ‘completely predictable’ for market participants. Rather he pointed to ‘sovereign debt trajectories and the elevated global policy uncertainties’ as reasons for the latest upward move in yields.

Villeroy de Galhau stated, ‘In the US, the risk of future trade restrictions and possibly immigration policies keep uncertainty about the outlook and inflation high, directly affecting risk premia’. This has also resulted in contagion of European yields. One major difference is expectations for monetary policy, which have declined in the euro area but increased in the US. ‘Monetary policy perspectives could and should rightly decouple’ said the governor, given that the ‘the disinflation trajectory is more clear-cut and the macro outlook is weaker’ in Europe.

To that end, the governor argued that ‘victory over inflation is now in sight’. The next steps will probably entail further policy cuts as well as ‘adjusting while keeping our toolkit, which will be a focus of our interim strategy review’. This will be a key focus of an OMFIF discussion in partnership with the Frankfurt School of Finance and Management next month.

Source：omfif

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Adam

Economic

South Korea’s GDP Per Capita Outpaces Japan and Taiwan

In a significant economic shift within East Asia, South Korea has officially surpassed Japan and Taiwan in GDP per capita, marking a milestone in the region’s economic landscape. According to the latest data from South Korea’s Ministry of Finance, the Bank of Korea, and the National Statistical Office, the country’s GDP per capita reached $36,024 in 2024, reflecting a 1.28% increase ($454) from the previous year.

Meanwhile, estimates from the International Monetary Fund (IMF) in October 2024 projected that Japan’s GDP per capita would reach $32,859, while Taiwan’s would be $33,234, both falling short of South Korea’s $36,132 projection.

This shift underscores South Korea’s continued economic expansion, as it first crossed the $30,000 GDP per capita threshold in 2016. The figure peaked at $37,000 in 2021 before declining to $34,810 in 2022 due to global economic slowdowns. However, the country has regained momentum with two consecutive years of growth since 2023, positioning itself ahead of its regional competitors.

What is Driving South Korea’s Economic Edge Over Japan?

South Korea’s GDP per capita growth in 2024 can be attributed to three key factors:

Improved trade conditions

Rising export prices for key industries

Effective inflation control

The GDP deflator, an index that reflects the overall price level of goods and services, rose by 3.8% in 2024, the highest increase since the 1998 Asian Financial Crisis.

A significant factor behind this trend was the price surge in semiconductor exports, a crucial driver of South Korea’s economy. At the same time, raw material costs, particularly crude oil, declined, improving the country’s trade conditions and boosting GDP growth.

Another contributing factor is South Korea’s declining population growth rate, which artificially raises GDP per capita even if total economic output remains stable. However, the depreciation of the South Korean won (KRW) against the U.S. dollar has somewhat limited GDP per capita growth, as a weaker currency reduces purchasing power in international comparisons.

Future Economic Outlook: South Korea Poised to Reach $37,000 GDP Per Capita in 2025

The South Korean government projects that if the current growth trajectory continues, GDP per capita could reach $37,000 in 2025, reaffirming the nation’s steady economic expansion.

However, risks remain. The global semiconductor market, while currently a strong driver of growth, remains volatile, and geopolitical uncertainties in East Asia, as well as trade tensions with major partners, could influence South Korea’s economic trajectory.

Despite these challenges, South Korea’s ability to maintain stable inflation, leverage its strong export sectors, and adapt to shifting global market conditions has allowed it to overtake Japan, marking a historic economic transition in the region. If the trend persists, South Korea may further solidify its position as one of Asia’s leading economies, with long-term implications for the balance of economic power in the region.

Source: The Korea Times

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Owen Li

Economic

Forex

Nonetheless, investors remain cautious about ongoing tensions between the US and China, as Washington’s additional 10% tariffs on Chinese imports have taken effect. So far, there has been no scheduled phone call between US President Donald Trump and Chinese President Xi Jinping, raising uncertainty over whether negotiations will take place anytime soon.

China responded swiftly with retaliatory tariffs of up to 15% on U.S. coal and liquefied natural gas, along with a 10% increase in duties on crude oil, farm equipment, and select automobiles, set to begin on February 10. Additionally, Beijing has opened an antitrust investigation into Google, signaling that trade tensions may extend beyond tariffs and into regulatory action against US firms operating in China.

Unlike the previous trade disputes during Trump’s first term, the current tariff measures appear to be more of a bargaining tool for non-trade-related concessions, making a near-term resolution less likely. Given Beijing’s firm stance, the US may keep the tariffs in place while shifting focus to another geopolitical or economic issue. As a result, investors should prepare for prolonged trade frictions, with potential spillover effects into other sectors.

In the markets, one development to note is the strong bounce in US 10-year yield as safe-haven flows reversed. Technically, 55 D EMA (now at 4.478) could be a spot to provide enough support to end the corrective pull back from 4.809. Break of 4.664 resistance would argue that rise from 3.603 is ready to resume through 4.809. In case the correction extends, downside should be contained by 38.2% retracement of 3.603 to 4.809 at 4.348. Dollar would likely follow yield for its next move, in particular in USD/JPY.

Markets Stay Calm, Await Clarity from Trump-Xi Call_1

In Europe, at the time of writing, FTSE is down -0.10%. DAX is up 0.22%. CAC is up 0.36%. UK 10-year yield is up 0.062 at 4.551. Germany 10-year yield is up 0.038 at 2.429. Earlier in Asia, Nikkei rose 0.72%. Hong Kong HSI rose 2.83%. Singapore Strait Times fell -0.09%. Japan 10-year JGB yield rose 0.0265 to 1.276.

BoJ’s Ueda prioritizes underlying inflation trends, not short-term volatility

BoJ Governor Kazuo Ueda reiterated the central bank’s commitment to achieving its 2% inflation target on a sustained basis, emphasizing that the focus remains on underlying inflation rather than temporary price fluctuations.

Speaking before parliament, Ueda highlighted that BoJ filters out one-off factors such as fuel and volatile fresh food prices when assessing inflation trends.

However, he acknowledged “that process at times could be difficult”, reinforcing the need for careful analysis before making policy adjustments.

USD/CHF Mid-Day Outlook

Daily Pivots: (S1) 0.9065; (P) 0.9131; (R1) 0.9169;

USD/CHF dips mildly today as consolidation from 0.9200 extends with another downleg. Deeper fall could be seen but outlook will stay bullish as long as 0.8956/64 support holds. Firm break of 0.9200/9223 will resume the whole rally from 0.8374 and carry larger bullish implication.

Markets Stay Calm, Await Clarity from Trump-Xi Call_2

In the bigger picture, decisive break of 0.9223 resistance will argue that whole down trend from 1.0342 (2017 high) has completed with three waves down to 0.8332 (2023 low). Outlook will be turned bullish for 1.0146 resistance next. Nevertheless, rejection by 0.9223 will retain medium term bearishness for another decline through 0.8332 at a later stage.

Markets Stay Calm, Await Clarity from Trump-Xi Call_3

Source：Actionforex

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Daily News

[Quick Facts]

1.Von der Leyen: EU will be ready for tough negotiations with US.

2.20K+ accept Trump's government buyout offer, resignations expected to increase.

3.US job openings decline to 7.6 million, lowest since September.

4.Trump agrees to pause tariffs on Canada and Mexico.

[News Details]

Von der Leyen: EU will be ready for tough negotiations with US

European Commission President Ursula von der Leyen told a conference of EU ambassadors on Tuesday that the European Union (EU) is prepared for tough negotiations with the United States (U.S.) to safeguard its economic interests, and they will always protect their own interests. She said that European companies in the U.S. employ 3.5 million Americans, and another million American jobs depend directly on trade with Europe. The whole trade volume between U.S. is 1.5 trillion U.S. dollars. A lot is at stake on both sides. The transatlantic partnership is vital for both sides.

20K+ accept Trump's government buyout offer, resignations expected to increase

At least 20,000 federal employees have accepted what amounts to a buyout from the Trump administration, a source confirmed to a senior US government official on Tuesday. This is a significant number, which amounts to roughly 1 percent of the federal workforce, but it still falls short of the target of reducing the workforce by 5% to 10%. The offer remains open until Thursday, and despite strong opposition from labor unions and other quarters, the number of resignations is expected to increase sharply ahead of the deadline at the end of the week.“We anticipate that more people will accept the offer. If you look at what is happening at USAID, you will see that this is just one piece of the puzzle,” the official said. Previously, the White House had notified federal employees that they must decide by February 6 whether to return to the office full-time or choose to resign. Those opting for resignation would receive full pay and benefits for eight months, while being exempt from face-to-face work requirements during this period. The policy of mandating a return to the office is projected to lead to the resignation of 5% to 10% of federal employees and is expected to save up to $100 billion in annual expenditures.

US job openings decline to 7.6 million, lowest since September

Available positions decreased to 7.6 million from a revised 8.16 million reading in November, the Bureau of Labor Statistics Job Openings and Labor Turnover Survey, known as Jolts, showed on Tuesday (Feb 4). The pullback in openings was driven by professional and business services, partially reversing a surge in the prior two months. Health care and social assistance, as well as finance and insurance, also posted large declines.

The figures indicate job openings are back on a downward trend after big increases in recent months. This is expected to continue to restrain wage growth and support the Federal Reserve's view that the labor market is no longer a source of inflationary pressure. Moreover, while labor demand remains at a healthy level, the overall market tightness is easing.

Trump agrees to pause tariffs on Canada and Mexico

Earlier on February 3 local time, President Donald Trump spoke with Mexican President Claudia Sheinbaum. Following the call, both leaders announced that the United States and Mexico had agreed to immediately suspend the implementation of additional tariffs for one month and to continue negotiations. Shortly thereafter, Canadian Prime Minister Justin Trudeau also stated that President Trump had decided to defer the imposition of tariffs on Canadian products for at least 30 days. Canada, in turn, has abandoned plans to impose retaliatory tariffs on the United States.

With Canada and Mexico granted a 30-day deferral on tariff implementation, U.S. Treasury prices, which had been under pressure for months amid concerns that tariffs could drive up inflation, rebounded this week. The yield on the 10-year U.S. Treasury note fell 2.8 basis points to 4.515% late Tuesday, after hitting its lowest level since mid-December during trading on Monday.

Although Trump has agreed to delay the imposition of tariffs on Canada and Mexico for one month, global trade tensions remain in the long term.

[Today's Focus]

UTC+8 21:15: Release of the U.S. January ADP Employment Report

UTC+8 22:00: Thomas Barkin, President of the Federal Reserve Bank of Richmond, Will Participate in A Fireside Chat

UTC+8 23:00: Announcement of the U.S. January ISM Non-Manufacturing PMI

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The Commodities Feed: Retaliatory Tariffs Vs Iranian Sanction Risk

Energy – China retaliatory tariffs

USD/INR Maintains Position Above 87.00 after HSBC PMI Data Release

Economic Indicator

HSBC Composite PMI

Source: FXSTREET

Benefits of Trump’S Trade Strategy May Not Be Worth the Systemic Damage

China is the real target

Source：omfif

Trump tariffs: Europe Fces Worst of All Worlds

French governor Villeroy de Galhau sounds positive note on inflation

Source：omfif

South Korea Surpasses Japan in GDP Per Capita: Key Drivers Behind the Economic Milestone

South Korea’s GDP Per Capita Outpaces Japan and Taiwan

What is Driving South Korea’s Economic Edge Over Japan?

Improved trade conditions

Rising export prices for key industries

Effective inflation control

Future Economic Outlook: South Korea Poised to Reach $37,000 GDP Per Capita in 2025

Source: The Korea Times

Markets Stay Calm, Await Clarity from Trump-Xi Call

BoJ’s Ueda prioritizes underlying inflation trends, not short-term volatility

USD/CHF Mid-Day Outlook

Source：Actionforex

February 5th Financial News

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[News Details]

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