JANUARY 2025 — TARIFF MAN COMETH

Equities began the year on a positive note, with European markets rebounding sharply in January, led by the German DAX (+9%). While Chinese benchmarks saw slight declines, Canadian and Mexican markets gained approximately 3.5%, despite lingering tariff concerns. U.S. equities also advanced, though the Information Technology sector was a notable laggard — the only sector in retreat — pressured by the release of a highly efficient Chinese AI model (aka DeepSeek) that briefly cast doubt on massive, planned technology infrastructure Capital Expenditures in the U.S. While semiconductors and the data center ecosystem faced headwinds, Innovation thrived, led by Genomics (+14%). “Old Economy” standouts included Precious Metals (+12.5%) and Banks (+9%). Meanwhile, an index tracking recently IPO’d stocks surged 9%, reclaiming its 2021 highs. Equity volatility peaked at 22% but remained contained, with VIX averages holding near 17%.

Natural Gas fell 16%, reflecting seasonal weakness. Precious metals were in demand, with gold (+6.5%) hitting fresh all-time highs above $2,800, while silver (+9%) remains 35% below its 2011 peak. Coffee has more than doubled since 2023, surging 18% in January alone. Grain prices also advanced, gaining approx. 5%.

Global currencies stayed stable, with tariffs priced in. The BRL stood out with its 5.5% monthly gain. The CAD fell 1% in January, dipped further in February, then rebounded on tariff delays.

Canada’s 2Y sovereign yield dropped an impressive 30bps to 2.65%, now 160bps below its U.S. equivalent, a wide (2 std dev) differential. High-yield spreads tightened 25bps, nearing a 15-year low, at 265bps.

Bitcoin rose 9%, hitting an intramonth record of $109K in a relatively tame month for the volatile financial asset.

CHART OF THE MONTH

Canadian Economy at Risk Keeps BoC Vigilant

Economists warn a tariff war could push Canada into recession, shaving 200-400bps off GDP growth. In late January, traders priced in a dovish BoC response to blunt the economic impact, with an emergency cut possible.

The 2-year yield dropped 30bps, widening the CA-US yield gap to -160bps, its lowest on record (since 1989) and two standard deviations below mean (+44bps).

TARIFF FOR THAT

Tariff man cometh, with burdens untold,

To strike the land where trade once rolled.

Yet in his wake, a market shall bend,

Bond traders stir, yet blind to the end.

To soften the blow, with rates set to fall,

And steady the course, lest chaos befall.

Was this truly needed, a blow so severe,

To a long-time ally, through war and tear.

I found Fentanyl, whispered the blind man,

To his deaf woman, who heard Mexican.

That Governor holds nothing you need,

History whispers, 'You’re smoking weed.'

A war for what? For pride or gain,

Voters beware, inflation's reign.

Tariff man cometh, with burdens untold,

From Panama to Canada, chill takes hold.

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