Trading conditions were choppy last week, but the sentiment soured somewhat in equities and oil continued its downward journey for the third successive week. Potential and in the case of China very real trade restrictions are the sword of Damocles above stock markets. Although Friday’s nonfarm payrolls fell short of expectation the US labour market remains robust as unemployment retreated further and average hourly earnings remained solid. The winds of elevating consumer prices could understandably make further lowering US borrowing costs more implausible than even last week. These fears were aggravated over the weekend when Donald Trump promised to impose 25% punitive tariffs on all steel and aluminium imports.

The de-coupling of interest rates between the US and other economic powerhouses is a source of worry for oil bulls as a strong dollar will further dent optimism. The explicit softening of the WTI and Brent structures also suggests fundamental weakness in the physical markets. Conversely, the welcome relief rally in crack spreads, particularly in the CME Heating Oil/WTI price differential, could be taken as a sign of bottoming out. Updated oil balances will be released this week, but the January estimate from the IEA, which is in stark contrast with OPEC’s view, insinuates an average Brent price of around $77.50/bbl in 1Q. The 10% price drop to $74/bbl in the space of less than a month might be another indication that an upside correction, without anticipating a meaningful break over the year’s peak, is in order – pending US politics.

The Art of Dealing with Donald Trump

To paraphrase and enrich the opening sentence of the Communist Manifesto by Karl Marx and Friederich Engels: A spectre is haunting Europe, including Greenland, and America, including Panama, Mexico and Canada, and Asia, including the Middle East and the global economy – the spectre of Donald Trump. Indeed, his presence permeates every walk of life, his words are scrutinized, and his actions cause anxiety and nervousness and move markets.
The narrative and the agenda of his administration, more often than not, are controversial and even incoherent. Just a few examples that left commentators, allies, adversaries and markets baffled: boots or no boots in Gaza? After announcing import tariffs on Mexican and Canadian imports, he agreed on a 30-day reprieve after last-minute concessions were reached. In an executive order, he signalled the revival of ‘maximum pressure’ on Iran and promised a relentless campaign to drive the country’s oil exports to zero. A day later he confessed he would prefer a verified nuclear peace agreement and a prosperous Iran. The US Treasury provided access to the critically sensitive US payment system to the unelected billionaire, Elon Musk, only for a judge to block it a day later. The US Postal Service suspended accepting packages from China and Hong Kong but reversed the ban almost immediately.

It is anything but clear that the hectic and volatile decision-making is the result of Mr Trump’s modus operandi of seeking leverage before striking deals and pushing the boundaries of the US judiciary or his moves are influenced by mood swings. Either way, investors are forced to react instead of proact. Yet, as volatile as the political, economic and trading environment has become it is noticeable that the relationship between different asset classes has not changed in the past three perplexing weeks from 2024. The gap between equities and oil keeps widening. Last year was characterized by an equity bull market where the US outperformed the rest of the world. The MSCI All-Country Index returned 16% and the Nasdaq Composite Index 29%. The US crude oil benchmark, WTI, on the other hand, was flat.

In the past three weeks, since Donald Trump’s inauguration, this underlying trend has prevailed. Appetite for equities has remained healthy, although it is noticeable that global stocks have bested the Nasdaq Composite Index last week, with US stocks losing value. It might be a sign of uneasiness about the impact of possible tariffs on the US economy. In any case, the mood remains optimistic. During the same period, oil continued its downward journey. Again, whether it is because of fundamental weakness or the US President’s declared desire to bring oil prices lower is open to interpretation.

The question that occupies most investors’ minds is what to expect in the future. Will the confrontational, hostile and threatening stance be the new norm or is it possible to please the US President, with a particular focus on trade? The agreement to delay the Canadian and Mexican excise taxes implies that common ground can be found.
In fact, what the Canadian Prime Minister, Justin Trudeau accomplished was nothing short of a masterstroke. In exchange for delaying the introduction of tariffs, he promised to appoint a fentanyl czar, to constrain drug trafficking from Canada to the US. It is a rather meaningless position because less than 1% of the fentanyl sent to the US comes from Canada but the issue of trade deficit has temporarily been taken off the agenda.

The US President can be criticized and even mocked but as long as he gets something he can call victory, he is more than willing to compromise. Coming from this angle it is worth examining what other threatened regions and countries might offer to curry favour with him. As for Europe and Greenland, volunteering to significantly increase defence spending, frankly, a justified demand from the US, would be a major stride in the right direction. In the Middle East, the ill-fated proposal of displacing 2 million Palestinians might be re-considered in return for increasing oil production and Saudi investment in the US. China might promise to cooperate with the US to fight the flow of fentanyl from the East to the West and TikTok can also be used as a bargaining chip.

Nothing can be taken for granted with the US president. Trade deficits clearly provoke his ire. Yet, instead of tit-for-tat measures, a sycophant attitude toward him, embodied in offering concessions in seemingly unrelated matters, might mitigate the adverse impact of his economic and expansionist policies. It could be impossible to eliminate the threat of trade restrictions and territorial demands, but it is not unrealistic to assuage it. An ostensible Faustian bargain is more sensible than the ominous alternative of denouncing him resulting in a full-blown trade war.

Overnight Pricing