A look at the day ahead in U.S. and global markets from Mike Dolan
After a four-day guessing game and much financial turbulence, the United States and China appear to have resumed a tit-for-tat trade war while Mexico and Canada get at least a month to breathe - leaving markets somewhat punchdrunk and wary of next steps.
The upshot for currencies most violently disturbed by the process is Mexico peso's and Canada's dollar are both back higher than they were when the latest merry-go-round of threat, counter-threat and deferrals began on Friday - bouncing from respective two- and 22-year lows hit in the interim.
Despite the deadline for 10% U.S. tariffs on China passing earlier on Tuesday and China's instant retaliation with plans for import taxes of up to 15% on a range of U.S. goods from next week, the yuan was firmer and also back where it was on Friday.
That peculiar reaction suggests some hope remains that the negotiated delays and deferrals seen in Canada and Mexico would be replicated in China too. U.S. President Donald Trump's press secretary said Trump would speak with Chinese President Xi Jinping in the next couple of days.
More broadly, the dollar index aped all those moves - completing a 1.5% round trip that took it to three-week highs and back since Friday. There was still no clarity on whether Trump planned tariffs against the European Union.
Weightings of the yuan, peso and Canadian dollar in the Federal Reserve's broad trade-weighted dollar index come to some 41% - add the euro and that amounts to more than 60%.
Complicating the market readout somewhat is the fact that mainland Chinese markets remained closed for the lunar new year holiday until tomorrow - although reopened Hong Kong saw shares there gain almost 3% to three-month highs even after the bilateral tariff salvos were delivered.
Some analysts suggest the hopes of talks and delays encouraged the buying, with others saying there was relief the proposed U.S. tariffs were only 10% - compared to the 60% Trump touted before the election.
Nevertheless Beijing announced its own levies of 15% on U.S. coal and LNG and 10% for crude oil, farm equipment and some autos from Feb. 10.
China also started an anti-monopoly probe into Alphabet's Google, while including both PVH - the holding company for brands including Calvin Klein - and biotechnology firm Illumina on a list for potential sanctions.
That comes as Alphabet tops the latest sweep of megacap quarterly earnings reports tonight on Wall Street, with Big Pharma companies also dominating the diary along with the likes of Omnicom and Advanced Micro Devices.
Unlike currency markets, U.S. stock indexes, unnerved by the trade war threats, have not yet returned to Friday's square one.
Even though the Mexico and Canada delays helped equities rally from Monday's worst levels, the S&P500 ended 0.8% lower and futures remain negative before Tuesday's bell after the overnight China developments.
The VIX 'fear index' of Wall Street equity volatility probed above 20 again on Monday - though it has yet to close above that level so far this year.
Aside from the multiple corporate headaches that tit-for-tat trade wars create for major exporting and importing companies, the other problem is how borrowing costs have been nudged higher due to widespread fears of the inflationary impact of sweeping tariffs.
Benchmark 10-year U.S. Treasury yields remain higher on the week and expectations of Fed cuts this year have dialled back a touch, with both Fed officials and investors working out the extent to which the tariff moves aggravate the politically-toxic price outlook.
While there's some debate about whether one-off price hikes of this kind would necessarily lift the inflation rate per se, there are reasonable concerns that the endless threats and even the drip-drip application of them lifts inflation expectations.
And this is just part of a series of seeming contradictions in Washington's policy approach that markets are grappling with.
If tariffs are applied, the dollar seems primed to go higher - in direct opposition to Trump's repeated claims about its overvaluation, while also helping overseas firms to absorb the tariffs and keep prices of their goods in U.S. stores down.
Retaliatory tariffs on U.S. goods overseas, meantime, just hit U.S. exporters.
What's more, the assumption of aggravated inflation, even at the margin, just keeps interest rates higher and stock markets under a cloud - again counter to the stated preferences of the new administration. Even its much-vaunted love of the crypto industry has been questioned, as Bitcoin and other tokens get whacked by the dollar rise on the trade spat.
Back in the domestic economy, attention will quickly be drawn back to this week's multiple labor market updates later today as December job openings are due for release ahead of Friday's January payrolls report.
Elsewhere, corporate earnings came thick and fast in Europe.
Fourth-quarter profit at UBS exceeded forecasts but the lender's shares fell 5% as its buyback plans, contingent on no changes to Swiss capital rules, failed to impress investors.
Infineon, however, jumped 11% after the German chipmaker's beat and slightly raised full-year revenue outlook.
And French 10-year government debt premiums over Germany fell back to 70 bps for the first time in four months after French Prime Minister Francois Bayrou finally pushed through the 2025 budget bill through parliament - betting he has enough votes to survive a likely no-confidence motion.
Key developments that should provide more direction to U.S. markets later on Tuesday:
* US December factory goods orders, Dec JOLTS job openings data,
* Federal Reserve Vice Chair Philip Jefferson, San Francisco Federal Reserve President Mary Daly and Atlanta Fed chief Raphael Bostic speak
* US corporate earnings: Alphabet, Advanced Micro Devices, Texas Instruments, Omnicom, Pfizer, Amgen, Merck, Regeneron, Juniper, Amcor, Prudential Financial, Apollo, KKR, Fox, Estee Lauder, Pepsico, Pentair, Chipotle, Mondelez, Veralto, Match, FMC etc
(By Mike Dolan, editing by XXXX; mike.dolan@thomsonreuters.com)
