German Yields Drop as Strong Euro Pressures ECB

US Signals De-escalation Amid Military Buildup

President Donald Trump stated on Thursday that he plans to hold talks with Iran, introducing a diplomatic possibility amid heightened military tensions over Tehran's nuclear program. While Trump did not provide details on the timing or attendees for the potential discussions, he expressed a preference for avoiding military conflict.

The offer for dialogue was balanced by a reminder of American military readiness. Trump confirmed that significant U.S. naval forces are positioned near Iran. Echoing this stance, Defense Secretary Pete Hegseth said the Pentagon is prepared to execute any orders from the president concerning Iran, reinforcing the U.S. position that Tehran must not be allowed to obtain nuclear weapons.

These comments came just one day after Trump warned Iran to agree to a nuclear deal or risk facing a "far worse" attack. Iran had responded with threats of retaliation against the United States, Israel, and their supporters.

Crude Oil Retreats on Reduced Conflict Fears

The signal of potential U.S.-Iran dialogue had an immediate effect on global energy markets, with oil prices declining on Friday. The prospect of negotiations eased near-term fears of a supply shock that a wider military clash could trigger.

The market reaction was reflected in key benchmarks:

• Brent crude fell by $1.10 to close at $69.61 a barrel.

• U.S. West Texas Intermediate (WTI) slid $1.25, settling at $64.17 a barrel.

Russia Urges Calm as Volatility Hits Broader Markets

Russia entered the discussion by urging both Washington and Tehran to pursue negotiations and warning against the use of force. Kremlin spokesman Dmitry Peskov noted that the potential for talks had not been exhausted and that any military strike could unleash "dangerous consequences" and regional "chaos."

The shifting risk landscape also influenced assets beyond the energy sector. As investors weighed the evolving geopolitical situation, Bitcoin experienced volatility, falling 5% to $84,630 during the day's trading.

OPEC+ is widely expected to keep its oil production quotas unchanged for March, even as crude prices push past $70 a barrel on fears of a potential US military strike against member-state Iran.

According to five delegates from the alliance, the group is unlikely to alter its current output strategy when it meets on Sunday.

Production Freeze to Continue

The meeting involves eight key OPEC+ producers who collectively supply about half of the world's oil: Saudi Arabia, Russia, the United Arab Emirates, Kazakhstan, Kuwait, Iraq, Algeria, and Oman.

This coalition previously increased production quotas by approximately 2.9 million barrels per day—about 3% of global demand—from April through December 2025. However, they froze further planned increases for the period of January through March 2026, citing seasonally weaker consumption patterns.

Three of the five delegates, who spoke on the condition of anonymity, confirmed that Sunday’s meeting is unlikely to yield any new decisions beyond the March timeframe. Officials from OPEC, Saudi Arabia, and Russia did not immediately provide comments.

A separate panel, the Joint Ministerial Monitoring Committee (JMMC), is also scheduled to meet on Sunday, but it does not have the authority to set production policy.

Geopolitical Risks Driving Oil Prices Higher

The decision to hold steady comes as Brent crude has climbed to nearly $72 a barrel, its highest level since August, defying earlier speculation that a supply glut would depress prices.

The market's primary driver is the escalating tension between the United States and Iran. Key factors include:

• US Pressure: President Donald Trump has intensified his campaign to curb Iran's nuclear program, threatening military action and deploying a US naval group to the region.

• Sanctions: Washington has already imposed extensive sanctions designed to block Tehran’s oil revenue, a critical source of state funding.

• Potential Strikes: A Reuters report on Thursday, citing US sources, indicated that President Trump is considering targeted strikes on Iranian security officials and senior figures to foment unrest and potentially weaken the ruling system.

Broader Supply Concerns Support Market

Beyond the situation in Iran, oil prices have also found support from supply disruptions in Kazakhstan. The country's oil sector has experienced a series of operational setbacks in recent months.

However, Kazakh officials announced on Wednesday that the massive Tengiz oilfield is being restarted in stages, which could help stabilize supply.

The Eurozone economy maintained a steady 0.3% quarter-on-quarter growth rate in the fourth quarter of 2025, outperforming downbeat expectations. This resilience was largely driven by accelerating growth in Germany and Spain, with support from Italy, which together compensated for slower performance in France.

Sentiment and Production Signal a Brighter Outlook

Looking ahead, the Eurozone appears poised for accelerated growth. A key signal comes from the European Commission's economic sentiment indicator, which surged in January to its highest level in three years. This optimism was not isolated, showing a broad-based improvement across member states and major economic sectors.

Furthermore, the industrial sector began a revival in late 2025. This production upswing is expected to gain momentum, fueled by increased defense investment across the bloc and new infrastructure spending in Germany.

Key Headwinds Could Limit Upside

However, significant challenges continue to cloud the outlook. The global economic environment remains uncertain, and the Eurozone's declining competitiveness is a persistent issue. Consequently, trade is expected to be a drag on growth this year.

Deeper structural problems are also not being resolved quickly enough, which could limit the region's long-term economic prospects.

Despite these external pressures and internal challenges, the domestic economy appears strong enough to drive a modest acceleration in growth. In an environment of global turmoil, even this level of progress marks a notable achievement for the Eurozone.

Ukrainian President Volodymyr Zelenskiy has indicated that Kyiv is prepared to halt hostilities if Russia stops its attacks on the country's critical energy infrastructure. The statement comes as the capital, Kyiv, endures freezing temperatures, though Zelenskiy clarified that no formal truce is in place.

This potential de-escalation follows a proposal from the United States. On Thursday, U.S. President Donald Trump stated that Russian President Vladimir Putin had consented to a one-week pause in attacks on Kyiv due to the severe cold, with temperatures expected to drop to minus 26 degrees Celsius.

Figure 1: Ukrainian President Volodymyr Zelenskiy discusses the terms of a potential US-brokered de-escalation with Russia.

A US-Led Initiative, Not a Formal Agreement

Speaking to reporters in Kyiv, Zelenskiy explained that the de-escalation concept was introduced by the U.S. during trilateral peace negotiations in Abu Dhabi last weekend. He framed the proposal as a starting point for diplomacy rather than a finalized deal.

"The Americans said they want to raise the issue of de-escalation, with both sides demonstrating certain steps toward refraining from the use of long-range capabilities," Zelenskiy said in remarks released Friday. "At this stage, this is an initiative of the American side... We regard it as an opportunity rather than an agreement."

The Kremlin has not yet issued any public comment on the proposed energy ceasefire.

Attacks Continue Amid Diplomatic Overtures

Despite the diplomatic discussions, Russian attacks on Ukraine persist. The Ukrainian Air Force reported on Friday that Russia launched a ballistic missile and 111 drones in overnight strikes.

While regional officials confirmed airstrikes in frontline areas, there were no immediate reports of these attacks targeting energy facilities. A ceasefire for the energy sector would mark a significant development as the war approaches its fourth anniversary next month.

Russian forces are maintaining their advance in the eastern Donetsk region, complemented by almost daily drone attacks on Ukrainian cities far from the frontlines. Since last autumn, Russia has intensified its assault on Ukraine's power grid, causing widespread blackouts and leaving Kyiv without heat during one of the most severe winters in a decade.

Core Obstacles to Peace Remain Unsolved

Previous diplomatic efforts to end the conflict have failed to yield tangible results, and major disagreements continue to block progress. Key unresolved issues include:

• The territorial status of Donetsk.

• Control of the Zaporizhzhia nuclear power plant, the largest in Europe.

• President Putin's demand that Ukraine surrender the 5,000 sq km (1,900 sq miles) of territory it still controls, which constitutes about 20% of the disputed region.

Zelenskiy has consistently rejected any proposal that involves surrendering territory Ukraine has fought to defend.

Uncertainty Looms Over Future Talks

The path forward for negotiations remains unclear. Zelenskiy stated he did not know when the next meeting between Russian, Ukrainian, and U.S. representatives would occur.

Adding to the uncertainty, U.S. Secretary of State Marco Rubio said Wednesday that top envoys Steve Witkoff and Jared Kushner would not attend the next meeting scheduled for the weekend in Abu Dhabi. Zelenskiy stressed the importance of having the same personnel present to ensure continuity and monitor progress from previous discussions.

"The date or the location may change," Zelenskiy noted, suggesting external factors could be at play. "In our view, something is happening in the situation between the United States and Iran. And those developments could likely affect the timing."

Official data released Friday confirms Japan held back from intervening in currency markets through the last month, relying solely on verbal warnings to defend the struggling yen.

According to the Ministry of Finance, Japan spent no funds on currency intervention between December 29 and January 28. This clarifies that a mysterious 1.7% surge in the yen on January 23, which occurred after a Bank of Japan decision and near an 18-month low against the dollar, was not the result of direct government action.

Rate Checks and Coordinated Warnings

In the days following the jump, the yen continued to rally on reports that finance officials in Tokyo and Washington were conducting "rate checks"—a move often seen as a precursor to intervention. This fueled speculation of rare, coordinated action to support Japan's currency.

However, money market data from the Bank of Japan later showed none of the massive capital outflows that typically accompany direct market intervention.

Top officials have remained tight-lipped on the matter. Finance Minister Satsuki Katayama and top currency diplomat Atsushi Mimura have both declined to comment on the rate checks. Mimura simply stated that Japan would maintain close coordination with the United States on foreign exchange and act appropriately.

Fundamentals Outweigh Government Threats

Despite the tough talk, the yen's advance was short-lived. On Friday, it fell 0.5% to 153.79 per dollar.

Market analysts argue that fundamental economic pressures are the real drivers behind the yen's valuation, making any intervention a temporary fix at best.

"History tells you that intervention is only a temporary solution to a weaker currency," said Rodrigo Catril, a currency strategist at National Australia Bank in Sydney. "There are real and fundamental arguments as to why the yen is where it's at."

While authorities have warned they are ready to counter speculative, one-sided moves, their actions have so far been restrained. Still, Japan has significant firepower, with foreign currency reserves totaling $1.16 trillion as of December.

Economic Strain and Political Stakes

The yen's prolonged weakness and a recent surge in Japanese government bond (JGB) yields to record highs reflect growing investor concern over the nation's strained finances. This market volatility comes at a critical time for Prime Minister Sanae Takaichi, who faces a snap election on February 8 and is seeking a mandate for her economic reflation agenda.

The last time Japan engaged in major currency intervention was in 2024. At that time, the government spent a record 15.3 trillion yen ($99.43 billion) to prop up the currency as monetary policy diverged sharply between the Federal Reserve and the Bank of Japan.

($1 = 153.8800 yen)

British Prime Minister Keir Starmer’s high-profile visit to China marks another victory for Beijing in its ongoing rivalry with Washington. But while he returns to London with new deals in hand, the trip also exposes the stark limitations facing middle powers trying to navigate a world fractured by US-China tensions.

Starmer is the latest Western leader to court Beijing, following Canadian counterpart Mark Carney, who secured a trade deal just weeks earlier. These visits are becoming a pattern as leaders from Europe, India, and beyond seek alternatives to an unpredictable United States under President Donald Trump, who has spent his second term disrupting long-standing alliances.

UK Prime Minister Keir Starmer in Shanghai on January 30, 2026. His visit highlights a growing trend of Western leaders engaging with Beijing.

From London's perspective, engaging with China sends a clear message to Trump: if the U.S. continues to apply pressure over issues like Greenland or the USMCA trade pact, its traditional allies have other options. However, some analysts view these moves as "superficial gestures amid stalled global growth."

"Traditional U.S. allies feel hard done by and are now hedging their bets, but they are far from being able or willing to substitute China for the United States," said John Quelch, an expert in global strategy at Duke Kunshan University.

What the UK Actually Won

On his trip, Starmer secured a few tangible benefits for Britain:

• Visa-Free Travel: Britons gain 30-day visa-free access to China.

• Lower Whisky Tariffs: A key win for a signature British export.

• Major Investment: British pharmaceutical giant AstraZeneca unveiled a new $15 billion investment in China.

However, on more contentious topics, progress was limited to "frank dialogue." Key areas of tension—including China's stance on Taiwan, its close relationship with Russia, and the rights crackdown in Hong Kong—remain unresolved. The visit also drew criticism from politicians in both the UK and US over accusations of espionage and human rights abuses, which Beijing denies.

A Narrative Victory for Beijing

While the economic gains for Western nations are modest, the diplomatic visits are a significant boost for China's global standing. Beijing can present itself as a "reliable partner," contrasting its stability with Trump's chaotic tariff policies and frequent demands on allies.

"President Trump's efforts to decouple the United States from China are also decoupling the United States from the world," Quelch noted.

This narrative is reinforced with each visit, supporting the idea of a global "pivot to China" as a counterweight to American influence.

The Economic Reality of China's Trade Imbalance

The deals Western powers are striking come at the cost of deeper integration with an economy running on overdrive. China’s trade surplus hit a record $1.2 trillion last year—roughly the size of the Dutch economy. This surplus is fueled by a manufacturing sector so powerful that it overwhelms foreign markets, even as domestic consumption remains too weak to support its own producers.

The trade data tells a clear story of imbalance:

• European Union: China's exports grew 8.4%, while imports fell 0.4%.

• United Kingdom: China sold 7.8% more goods while buying 4.7% less.

• Canada: Chinese sales increased 3.2%, while purchases dropped 10.4%.

"These visits highlight the severe limits of any 'pivot' to China," said Alicia Garcia-Herrero, chief Asia-Pacific economist at Natixis. "They expose middle powers' vulnerability, chasing scraps while China's export flood overwhelms their industries."

The Risks of Getting Closer to Beijing

The flood of Chinese exports poses a direct threat to Western manufacturing. At its current pace, China's trade surplus is on track to match the size of France's $3 trillion economy by 2030 and Germany's $5 trillion economy by 2033.

"This makes it an especially risky proposition for countries trying to protect or grow their own manufacturing industries to substantially increase trade integration with China," warned Eswar Prasad, former China director at the IMF. "China hardly provides a safe harbour."

Furthermore, cozying up to Beijing invites backlash from Washington. Before Starmer even left China, Trump warned that it was "very dangerous" for the UK to get into business with Beijing. Similarly, Canada’s deal on canola and lobsters was met with threats of 100% U.S. tariffs and a warning against allowing Chinese EVs into North America.

A True Pivot or Just Damage Control?

Despite the risks, some analysts argue that these diplomatic missions are less about securing major trade wins and more about managing complex relationships. For countries like Britain and Canada, simply "reducing tension with Beijing" may be the most realistic goal.

Noah Barkin of the German Marshall Fund called the visits a "propaganda coup for Beijing" but clarified, "This is not a pivot to China. It is about reducing tension."

After all, previous deteriorations in relations with China exposed critical supply chain vulnerabilities and only widened trade imbalances. In a world dominated by two superpowers, the ultimate goal for middle powers is survival. As Barkin puts it, "No country wants to be in open conflict with the two superpowers at the same time."