In recent weeks, there has been an evident increase in global macroeconomic uncertainty, leading to heightened volatility in risk assetsThis has occurred during a period in which the Chinese stock market (A-shares) has been closed, coinciding with the Lunar New Year celebrationsThis hiatus in trading has not coincided with a lull in the international markets, where movements such as the Federal Reserve's decision to pause interest rate cuts have sent ripples through categories of major assetsFor instance, we have seen declines in US stock prices alongside drops in commodity prices, while both gold and the US dollar have experienced upward trendsInterestingly, emerging market equities have managed to perform better overall.

Amidst this swirl of uncertainty, gold prices reached historic highs once again, with COMEX gold futures climbing to $2866 per ounce by February 7. The US stock market, for its part, has shown volatility, especially following the emergence of Deepseek, a new player that has raised concerns regarding the technology sector within the USThis development has signaled a potential recalibration in the global perception of America's leading position in artificial intelligence (AI). It becomes clear that China is still capable of exerting influence in advanced technology domains, fostering an environment of competition moving forwardAfter the Lunar New Year, the Chinese A-shares market saw some uptick, prominently led by the computing sector, indicating that Deepseek's implications are resonating within investor sentiment.

Compounding the economic interplay, on February 1, the Biden administration announced a tariff imposition of 25% on imports from Canada and Mexico, alongside a 10% tax on goods from China, which took effect on February 4. These countries represent a significant portion of the US's imports, accounting for 41.7% of total US imports from January to November 2024, with Mexico at 15.6%, China at 13.5%, and Canada at 12.6%. Such measures suggest a deepening trade tension amidst already fraught economic relationships.

In response, both Canadian Prime Minister Justin Trudeau and Mexican President Andrés Manuel López Obrador moved to reinforce their borders against illicit drug trafficking and violence

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Trudeau mentioned a $1.3 billion plan aimed at bolstering border security, which involves granting terrorist designations to drug cartels and ensuring round-the-clock monitoring at the Canada-US boundaryOn the other hand, López Obrador’s administration plans to deploy 10,000 National Guard troops to Mexico's northern border to combat smuggling activities, coupled with assurances from the US to prevent weapons from being transported illegally into MexicoCollaboration between both countries is set to resume with a focus on security and trade discussions over the coming month.

Despite this temporary pause in tariff implementations against Canada and Mexico, the situation remains fluid, suggesting that significant volatility persists within the markets should a long-term agreement remain elusiveSuch uncertainty approximately equates to an intense chess game, where moves and counter-moves lead to unpredictable outcomes.

For the domestic Chinese market, analysts from CITIC Securities suggest there are two constant themes that should navigate trading strategies, even amidst the increasing complexitiesFirstly, the commitment to pro-active domestic policy moves remains unwavering, hinting that policy adjustments are likely to continue, providing a fertile ground for expectationsSecondly, there is an undeniable trend toward expanding economic and trade relationships with nations beyond the US, presenting possibilities for China's engagements under initiatives such as the Belt and Road, as well as breakthroughs with the European Union.

The momentous decisions from the Federal Reserve also warrant our attentionOn January 29, during a policy meeting, the Fed announced that it would maintain the federal funds rate between 4.25% to 4.50%, marking the first pause in cutting rates since initiating this cycle in September 2024. This decision aligns with previous indications from the Fed that a 'hawkish' stance would be adopted moving forward.

Chairman Jerome Powell, in a press conference following this rate decision, elucidated the rationale behind the monetary policy decision, emphasizing that there is no immediate urgency to adjust the policy framework since the economic and employment landscape appears robust

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Such remarks indicate that the Fed is likely to remain neutral in its upcoming March meeting, displaying an inclination towards cautious monitoring instead of drastic shifts.

However, the Fed's language in its statements stirred brief anxiety within the markets, particularly its description of the labor market which shifted from a prior acknowledgment of slowed job growth to affirming that the unemployment rate remains stable at low levelsSimilarly, the Fed’s portrayal of inflation transitioned from a depiction of easing to acknowledging it is still relatively highPowell later described this adjustment in language as a simplification, which, while disconcerting, reinforces how much weight the market places on the Fed's every word.

Compounding these challenges, inflation in the United States has been trending upwards in recent months, with the Consumer Price Index (CPI) increasing by 2.9% year-over-year in December 2024, a rise that breaks a three-month downward trajectory, diverging from the Fed's target of 2%. On one side, the labor market’s strength means ongoing robust wage growth, remaining around 4%, further entrenching inflation expectations among the consumer base.

Adding another layer of complexity, Powell warned of the extensive impact tariffs could impose on the economyThe unpredictability regarding their duration, scope, and the subsequent impacts stemming from retaliatory measures creates a challenging environment for forecasting how these tariffs will translate through to consumers.

As it stands, federal funds futures data from the Chicago Mercantile Exchange reflect investor expectations that the Fed may only lower rates twice by 2025, highlighting an environment characterized by cautious optimism coupled with a need for vigilance in these tumultuous economic waters.

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