Wall Street, Gold stumbled on Trump tariffs tantrum 2.0

·       Earlier Gold made a new life time high after a report indicating Israel/US JV may attack Iranian nuclear sites despite a dire warning by Iran

·       Trump imposed 25% tariffs on Mexico, and Canada for failing to stop Fentanyl and i8llegal immigrant trafficking into the US

·       Megalomaniac Trump also imposed 10% tariffs on China for alleged production of Fentanyl and distributing the same through Mexico-Canada border into the US

On Wednesday, although the FOMC statement was more hawkish than expected, overall Powell's Q&A was less hawkish as Powell tried to balance the market on a Fed day. Powell also indirectly hinted at QT's closing plan by the Fed. The Fed leaves the repo rate unchanged at 4.5%, and the statement did not include language that inflation had made progress toward the 2% objective as it had in the December statement.

Fed holds rates steady and takes a less confident view on inflation. Subsequently, traders' prices in less Fed easing this year after the FOMC statement as the Jan’25 Fed statement does not include language that inflation had made progress toward the 2% objective as it had in the Dec’24 statement. But Fed Chair Powell didn’t give any importance to it and it’s not a signal/forward guidance, just a refresh in language. Thus Wall Street Futures, USD, and also Gold recovered from the initial kneejerk reaction.

Gold also recovered and scaled a fresh life time high of almost $2800 on Trump’s fiscal stimulus plan, which may cause more public deficit, debt, and devaluation. Trump’s policy may cause more debt and more inflation, also positive for Gold. On Thursday, Gold surged on some temporary glitch in the Hamas-Israel hostage deal.

Fast-forward, to Friday Gold was further boosted in line with expectations of US core PCE inflation data for Dec’24 and a report that the US and Israel may attack certain Iranian nuclear sites, while the Iranian Foreign Minister has responded by warning that any such attack would be "one of the biggest historical mistakes the U.S. could make," potentially leading to "all-out war in the region--- Tehran will respond immediately and decisively if its nuclear sites are attacked, which will lead to all-out war in the region.”

Recent reports indicate that the United States and Israel are contemplating military action against Iran's nuclear sites due to escalating tensions and concerns over Iran's uranium enrichment activities. Israel acknowledges the complexity of striking Iran's nuclear sites, given their dispersion and fortification. Iran’s Foreign Minister Abbas said launching a military attack on Iranian nuclear sites would be “one of the biggest historical mistakes the US could make---Tehran will respond “immediately and decisively” if its nuclear sites are attacked, which will lead to “all-out war in the region.”

Nevertheless, Israeli officials believe that military action may be necessary due to the persistent threat posed by Iran and its allied groups. They are confident that US President Trump would support such action, contrasting with Biden admin’s more cautious approaches.

The U.S. and Israel have intensified their focus on Iran's nuclear capabilities, with intelligence suggesting that Iran has amassed enough enriched uranium for multiple nuclear bombs. This has prompted discussions about potential military strikes on Iran's nuclear facilities, particularly as Israel prepares its air force for possible preemptive actions.

US President Trump and Israeli PM Benjamin Netanyahu are expected to meet twice in Washington on Tuesday, once for a work meeting and then for an informal dinner. Israel believes Hamas won’t agree to free all living hostages in 2nd deal phase as they are its insurance policy vis-à-vis Israel. For this reason, some Israeli officials tell the network they believe there will be no choice but to return to fighting after the first phase ends.

Israeli Military Strategy: Israeli officials, including Prime Minister Netanyahu, have communicated to the U.S. that any military action would primarily target Iranian military installations rather than nuclear sites or oil infrastructure. This assurance comes amid heightened scrutiny from the Biden administration, which is concerned about the implications of strikes on nuclear facilities.

Biden Administration's Stance: President Biden has expressed disapproval of targeting Iran's nuclear infrastructure, emphasizing the need for a restrained response to Iranian provocations. He has engaged in discussions with Netanyahu to align strategies while attempting to prevent an escalation into a broader conflict.

Intelligence Leaks: Recent leaks of U.S. intelligence documents have revealed detailed plans regarding Israeli military operations against Iran, raising concerns within the Biden administration about operational security and the potential for miscalculation in an already volatile environment.

Iran's Position: In response to these developments, Iran continues to assert that its nuclear program is for peaceful purposes, despite international skepticism. The Iranian leadership has indicated that they would respond decisively to any military aggression from Israel or the U.S., which they view as acts of war against their sovereignty.

The situation remains fluid, with both U.S. and Israeli officials weighing their options carefully amid rising tensions with Iran. The focus appears to be on preventing Iran from advancing its nuclear capabilities while managing the risks associated with potential military strikes that could lead to wider regional conflict.

Under the ceasefire deal, Israel and Hamas agreed to a 42-day first phase that will see the return of 33 hostages. They will soon start holding talks on a potential second stage. That phase, if agreed on, would see the release of all remaining living hostages in return for a permanent ceasefire. The remaining bodies would be returned in a third phase. Israeli PM Netanyahu is expected to discuss the future of the ceasefire when he meets US President Trump next week Tuesday.

ThursdayNetanyahu on Thursday slammed the “shocking scenes” of mob chaos at the Gaza handover of two Israeli hostages and five Thai hostages to the Red Cross, and delayed Israel’s reciprocal release of Palestinian security prisoners as he demanded mediators prevent a repeat in the future hostage releases: “I view with utmost severity the shocking scenes during the release of our hostages---This is additional proof of the inconceivable brutality of the Hamas terrorist organization-- mediators ensure that such terrible scenes do not recur, and guarantee the safety of our hostages--whoever dares to harm our hostages will pay.”

The Israeli PMO later said Israel had indeed been given the necessary guarantees from mediators “that our hostages will be guaranteed safe passageway in the next releases.--Israel insists that lessons be learned and that the next rounds will have greater care in ensuring the safe return of our hostages.”

Now from geopolitics to economics and Trump tariffs, on Saturday (1st Feb’25), US President Trump implemented significant tariffs on imports from Canada, Mexico, and China. Goods from Canada and Mexico now face a 25% tariff, while Chinese imports are subject to a 10% tariff. These measures aim to pressure these countries to address issues such as illegal immigration and the flow of fentanyl into the US. President Trump has dismissed the possibility of delaying these tariffs, emphasizing the need to address trade deficits and national security concerns. He also hinted at potential future tariffs on European Union goods, as well as on products like steel, aluminum, copper, pharmaceuticals, computer chips, and even imported fuels.

In response, Canada and Mexico have vowed to implement retaliatory measures, while China has expressed strong opposition to the tariffs. The market is worried that these actions could lead to increased consumer costs and potential global economic disruptions.

Trump's New Tariffs: President Trump has officially imposed new tariffs effective February 1, 2025, which include a 25% tariff on imports from Canada and Mexico and a 10% tariff on goods from China. This decision has raised concerns about a potential escalation in Trump trade war 2.0

Rationale Behind Tariffs: The tariffs are primarily aimed at addressing issues related to illegal immigration and drug trafficking, specifically the flow of Chinese-origin (?) fentanyl into the US. Trump has asserted that these measures are necessary to pressure Canada and Mexico to enhance border controls. He stated, "Tariffs will make us rich & strong," indicating his belief in the economic benefits of these tariffs.

Economic Implications: The tariffs could significantly impact the North American economy, affecting nearly $1.6 trillion in trade. Analysts warn that such measures may disrupt supply chains, increase consumer prices, and provoke retaliatory actions from China, Canada, and Mexico, potentially leading to a global trade war, and even isolation of the US in the global trade under Trump.

Responses from Canada and Mexico: Canadian PM Trudeau has vowed to respond "forcefully" if the tariffs are implemented, indicating that Canada has prepared countermeasures worth up to C$150 billion. Mexican President

Future Tariff Plans: Trump has hinted at additional tariffs on various sectors, including oil and gas, with potential announcements expected around mid-February. He also indicated plans for further duties on computer chips and other imports from the European Union has taken a more cautious stance but has stated that Mexico is ready for dialogue and potential retaliation if necessary.

This latest round of Trump tariffs marks a significant development in U.S. trade policy under Trump's administration, reflecting his ongoing strategy to leverage tariffs as a tool for achieving broader political objectives.

On late Friday Trump said:

·       Asked about a report that he will delay the imposition of tariffs to March 1, Trump dismissed any possibility of China, Canada, or Mexico avoiding the new tariff

·       There is nothing that can be done by Canada, Mexico, and China that will change anything with the coming taxes going into effect on February 1

·       China makes the Fentanyl, gives it to Mexico, puts it through Canada...And so all three haven't treated us very well.

·       It's a pure economic. We have big deficits with...all three of them...we'll possibly very substantially increase it, or not, we'll see how it is

·       Tariffs are also coming at some point against the EU, and chips, oil and gas, steel, aluminum, copper, pharmaceuticals, medicine, and others.

·       We will impose tariffs on the European Union.

·       We will take very substantial action against unfair trade practices by the EU.

·       We are going to take the Panama Canal back.

·       Trump confirmed plans to speak with Russian President Putin, suggesting they may perhaps do something significant.

·       New tariffs on steel, aluminum, copper, and energy imports will be imposed, with oil and gas tariffs set to take effect by February 18

·       Trump claimed the move was a strategy to reduce trade deficits and to bring pharmaceutical and other manufacturing production back to the US.

·       Trump accused China of ‘taking hundreds of billions of dollars’ from the US before his presidency and criticized the EU and Canada for unfair trade practices.

·       Trump also suggested that tariffs could increase further

On Thursday, Trump also reiterated his tariffs threat for BRICS countries, calling on the bloc to abandon any plans of creating a new currency or face 100% Tariffs. Trump wrote in Truth:

The idea that the BRICS Countries are trying to move away from the Dollar, while we stand by and watch, is OVER. We are going to require a commitment from these seemingly hostile Countries that they will neither create a new BRICS Currency, nor back any other Currency to replace the mighty U.S. Dollar or, they will face 100% Tariffs, and should expect to say goodbye to selling into the wonderful U.S. Economy. They can go find another sucker Nation. There is no chance that BRICS will replace the U.S. Dollar in International Trade, or anywhere else, and any Country that tries should say hello to Tariffs, and goodbye to America!

On late Friday, Canadian PM Trudeau said if US President Trump chooses to implement any tariff affecting Canada, the country will be ready to respond similarly. In a Council on Canada-US Relations meeting, the prime minister stressed that any Canadian response would be "purposeful, forceful, and immediate," indicating that all options are considered. He highlighted that such US tariffs could increase costs for American consumers, particularly in sectors like oil, automotive, and agriculture. Trudeau, who previously met with Trump at his Mar-a-Lago resort in Florida, claimed that would respond to the tariffs as necessary until the U.S. removed the taxes: “We’re showing the new American administration that they have a strong partner in Canada when it comes to upholding border security, all while simultaneously underscoring that we won’t back down, that if tariffs are implemented against Canada, we will respond. We won’t relent until tariffs are removed and, of course, everything is on the table."

Market impact:

On late Friday, Wall Street Futures and Gold stumbled after the White House confirmed Trump tariffs on China, Canada and Mexico; as a trade war currency, USD surged, while UST. Gold slumped. Earlier Friday, Gold surged and made a new life time high of around $2817 on reports that US-Israel may be planning a military strike on Iran’s nuclear facilities. Also, some Israeli officials are now doubtful about the sustainability of the Gaza war ceasefire as Hamas may not eventually agree to hand over all the remaining Israeli hostages back to Israel in the 2nd phase despite the agreement. Hamas may be now feeling insecure and wants to have some Israeli hostages in its captivity as a guarantee for no big Israeli attack on them. But in that scenario, Israel may have also no other option, but to again start the Gaza war. Wall Street Futures and Gold were also buoyed by hopes of a more dovish Fed stance after mixed core PCE inflation data and mixed Fed talks.

Overall, Wall Street closed the week with a roller-coaster ride after the White House denied reports that President Trump was delaying tariffs by a month and confirmed his plans to impose tariffs on Mexico, Canada, and China this weekend, erasing earlier gains in stocks. The broader SPX-500 dropped -0.50%, the China-savvy DJ-30 slid -0.75%, while the tech-savvy NQ-100 edged down -0.15%.

Nvidia tumbled amid lingering concerns that growing Chinese competition and the US-China tech war may eventually impact its bottom line. Nvidia said: “We're ready to work with the US administration as we pursue our approach to AI.”  Open AI is now accusing DeepSeek of improperly harvesting its data and training the system. Also, Apple slumped despite earnings and guidance beast as the growing Trump trade war may also impact China sales and the vital supply chain. China is Apple’s 2nd largest market after the U.S.

On Friday, Wall Street was dragged by energy, techs, materials, consumer staples, industrials, banks & financials, utilities, healthcare, and real estate, while boosted by communication services/social media and communication services. Dow Jones 30 was boosted by Amazon, Amgen, Cisco, and Microsoft, while dragged by Chevron, NVIDIA, Nike, Boeing, Travelers, 3M, IBM and Caterpillar.

Conclusions:

Trump is using tariffs on US imports as leverage on exporting countries for various issues ranging from illegal immigration, drug trafficking, US trade deficit, the Make in America theme, the MAGA narrative, and also diplomatic/geopolitical issues. Trump may be using ‘tariffs’ rhetoric too much and may soon lose its importance/relevance. No exporters will pay additional tariffs on US exports; it is US importers, who have to pay these tariffs, which will push up the cost of imported goods despite stronger USD as a trade war currency.

Although Trump sounded less hawkish on Chinese tariffs as China is a critical supply chain for the US, helping price ability, Trump’s suspense and the intention to use them as a deal-making weapon may add more uncertainty together with immigration policies, which may affect inflation and the labor market and Fed’s task more difficult. Fed may be on hold in Q1CY25 to see & assess actual Trump policies.

Also, Trump can’t make the US a major manufacturing hub overnight replacing China and other vital exporters simply by threatening or even putting additional tariffs on those exporting nations as the US lacks China's massive industrial and logistic ecosystem. Also, being a developed economy, labor costs are much higher in the US than in China and other EMs. The US middle class still now afford a moderate cost of living because of cheaper imports from EMs; otherwise, it can’t afford costly consumer durable products if those were completely manufactured in the US. The US needs cheaper imported goods and also services to maintain price stability and the Goldilocks nature of the economy. Trump can’t manage inflation by simply imposing additional tariffs on imported goods & services and cutting taxes to encourage the ‘Make in America’ policy.

The US price stability and Goldilocks nature of the economy may be at stake and Trump is also risking Global trade isolation of the US; it’s the US which needs cheaper, but quality products from China and other developing countries/exporters, not the other way. In reality, both the US and China need each other for prosperity and development. Thus two superpowers and the largest economies in the world, controlling almost 50% of global GDP fairly compete with each other to coexist; trade and tech war are not the solution.

Realizing that too much dependency on the US, EU or any other nation for exports is not sustainable and risky for various reasons, China is already expanding its trade and geopolitical/global influence in various other untapped countries through direct/indirect investments and BRI. The same is not true for the US and thus despite various election rhetorics, Trump imposed only 10% additional tariffs on China instead promised 60%.

Bottom line:

In any way, Trump’s bellicose comments and trade, tariffs, the Gaza war, and others are now moving the market. Fed’s monopoly in controlling the market may be now in jeopardy under Trump 2.0 as we have seen during Trump 1.0. But Fed/Chair Powell may not be influenced easily by Trump’s narrative of lower inflation and lower rates. Megalomaniac Trump may be causing more harm to America through its tariffs and anti-immigration policies. In his latest bellicose tariff policy, Trump is trying to leverage huge US consumption power for issues like illegal immigration and drug trafficking against Mexico, Canada and also China; i.e. alleged suppliers rather than punishing US border security forces without whose active support, it is almost impossible for such illegal drugs and immigrants to enter into the US.

Weekly-Technical trading levels: DJ-30, NQ-100, and Gold

Looking ahead, whatever the fundamental narrative, technically Dow Future (CMP: 44650) now has to sustain over 45300-45500 any further rally; otherwise sustaining below 45200, DJ-30 may again fall to 44500/44100-43700/43300 and 42800/41900 and further 41200/40600-40400/40000 in the coming days.

Similarly, NQ-100 Future (21900) has to sustain over 22200-22300 for a further rally to 22500/22700-23000/23300 in the coming days; otherwise, sustaining below 22100, NQ-100 may again fall to 21700/21300-21100/20700 and further 20500/20300-20100/19250 in the coming days.

Also, technically Gold (CMP: 2798) has to sustain over 2850 for a further rally; otherwise sustaining below 2840-2825 may again fall to 2770/2755-2725/2690 and further 2675/2655-2610/2560 in the coming days.