Trump's Fed Pressure May Create a "Two Popes" Crisis

The European Central Bank sees no immediate need to debate interest rate changes, with its current policy settings seen as appropriate for the next several years. However, ECB Chief Economist Philip Lane has highlighted that potential shocks, particularly a deviation by the U.S. Federal Reserve from its mandate, could disrupt this stable outlook. A cyclical economic recovery is anticipated for the euro zone this year and next, assuming the bank's baseline scenario holds.

According to Lane, the ECB is not in a hurry to alter its policy. The central bank has kept rates on hold since concluding a rapid rate cut cycle in June. This decision is supported by surprisingly strong economic growth and inflation that appears to have stabilized around the 2% target for the foreseeable future.

ECB Chief Economist Philip Lane has signaled that interest rates will likely remain stable, citing a steady economic outlook.

The Federal Reserve: A Potential Shock to the System

A significant risk to Europe's benign economic outlook originates from the United States. President Donald Trump's ongoing efforts to influence interest rates and accelerate cuts to borrowing costs, faster than the Fed deems appropriate, introduce a major uncertainty.

In an interview with Italian newspaper La Stampa, Lane outlined the potential consequences. "It would be economically difficult for us if inflation in the U.S. did not return to target, or if financial conditions in the United States spilled over to a rising term premium," he said.

He also noted that a "reassessment of the future role of the dollar, could also constitute a kind of financial shock to the euro." Lane concluded, "So there are scenarios where, if the Federal Reserve departed from its mandate, that would create a problem."

The Fed operates under a dual mandate of promoting maximum employment and stable prices, defined as a 2% inflation rate. This differs from most central banks, which have a primary focus on inflation.

Euro Zone's Steady Path and Structural Hurdles

Despite these external risks, Lane expressed confidence in the Fed's policy direction. He reiterated that the ECB's December projections point to a sustained stabilization of inflation at the 2% target within the euro zone.

"In these circumstances, there is no near-term interest rate debate," Lane stated, dismissing questions about a potential rate hike. "The current level of the interest rate delivers the baseline for the next several years. But if we see developments in either direction, we will react."

Market sentiment aligns with this view. After a brief period of pricing in a possible rate hike for late 2026, investors now expect the deposit rate to remain steady at 2% throughout this year.

The economic backdrop includes the euro's sharp appreciation against the dollar last year, which was driven by investors moving out of dollar assets amid policy uncertainty. This strengthened euro has challenged European export competitiveness, compounding pressure from inexpensive Chinese goods that are already displacing European products in key markets.

Looking ahead, Lane anticipates a stronger cyclical recovery for the 21-nation euro zone in the coming year. However, he cautioned that the region's potential for long-term growth remains low and will require deep structural changes to shift into a higher gear.

Taiwan's government is publicly defending a landmark trade agreement with the United States after facing growing concerns that the deal could hollow out the island's world-leading technology sector. The debate intensifies as Taiwan Semiconductor Manufacturing Co. (TSMC), the nation's most critical company, continues its major expansion into the U.S.

Under the new agreement, Taiwanese firms have committed at least $250 billion in direct investment to boost American manufacturing in semiconductors, energy, and artificial intelligence. TSMC is leading this initiative, pouring significant capital into new fabrication plants and advanced packaging facilities in Arizona.

An Expansion, Not a Relocation, Officials Insist

Addressing the criticism, Vice Premier Cheng Li-chiun framed the overseas investments as a strategic move. "This is not an industrial relocation, but instead an extension and expansion of Taiwan's technology industry," she stated, assuring that the government remains committed to supporting companies that maintain their home base and increase local investment.

Cheng also emphasized that the U.S. goal of building a secure domestic chip supply chain does not rely solely on Taiwan. She noted that Washington is collaborating with multiple international partners and domestic American chipmakers to achieve its objectives.

"Everyone is working together in the United States to revitalize the development of the AI industry," Cheng added. "It is not something Taiwan is expected to accomplish on its own."

Echoing this sentiment, Premier Cho Jung-tai praised the negotiators for securing the deal, highlighting the significant effort involved.

Rising Concerns Over a Weakened 'Silicon Shield'

Despite official reassurances, some Taiwanese analysts and lawmakers are worried that the massive shift of capital and manufacturing capabilities abroad could erode the island's domestic high-tech ecosystem.

These fears were amplified after U.S. Commerce Secretary Howard Lutnick suggested relocating 40% of Taiwan's supply chain to America. The U.S. Commerce Department also noted that the agreement is designed to "drive massive reshoring of America's semiconductor sector."

For years, Taiwan's dominance in producing the world's most advanced chips has been considered a "silicon shield"—a strategic asset deterring potential military action from China. The opposition Kuomintang party has accused the ruling Democratic Progressive Party of jeopardizing this shield by making trade concessions to Washington.

TSMC's Strategy and Future Capacity Projections

TSMC, which is committing an additional $100 billion to its U.S. operations, has sought to calm these concerns. Company executives insist that their most advanced, leading-edge technologies will be developed and deployed in Taiwan for years before being transferred to overseas facilities.

Chief Financial Officer Wendell Huang explained the logic: "The most leading-edge technologies will be run in Taiwan because of practical reasons. When they get stabilized, then we can try to accelerate the technology to move overseas."

Speaking in Taipei, Economics Minister Kung Ming-hsin offered concrete projections on Taiwan's continued dominance in advanced chip manufacturing:

• By 2030: Taiwan is expected to hold approximately 85% of the global capacity for advanced chips (5 nanometers and below), with the U.S. accounting for about 15%.

• By 2036: Taiwan's share is projected to be around 80%, while the U.S. share will grow to roughly 20%.

Economic Impact Weighed Against Political Stakes

According to analysis from Bloomberg, the trade agreement is expected to have only a modest direct influence on Taiwan's economy. However, it carries significant political weight, especially amid rising geopolitical pressure from China.

The deal, which includes a tariff reduction on Taiwanese goods from 20% to 15% in exchange for $500 billion in investment or financing, is also expected to significantly boost domestic semiconductor production in the United States over the next decade.

BOJ Expected to Maintain 0.75% Policy Rate

The Bank of Japan (BOJ) is expected to hold its policy rate steady at 0.75% during its upcoming two-day monetary policy meeting. Following a rate increase in December 2025, the central bank is now in an assessment phase, closely monitoring the effects of its monetary tightening on Japan's economy and inflation.

Upgraded Economic Outlook on the Horizon

A key focus of the January meeting will be the release of the BOJ's quarterly "Outlook for Economic Activity and Prices." The central bank is preparing to revise its economic growth forecasts upward for fiscal years 2025 and 2026.

This marks a notable shift from the previous outlook report in October 2025, where the median forecast from board members projected real gross domestic product (GDP) growth at 0.7% for both fiscal years.

Key Drivers Behind the Forecast

The more optimistic growth projections are fueled by several positive factors:

• Government Stimulus: The government's supplementary budget is anticipated to stimulate household spending and corporate capital investment. Policymakers expect the most significant impact from these measures to occur in fiscal 2026.

• External Strength: A strong U.S. economy is providing a favorable external environment.

• Weak Yen Advantage: The depreciated yen continues to boost Japan's export performance.

Canada and China have reached an initial trade agreement that dramatically lowers tariffs on Chinese electric vehicles and Canadian canola, signaling a major reset in economic relations. Prime Minister Mark Carney announced the deal on Friday in Beijing after meeting with Chinese leaders, including President Xi Jinping.

The agreement aims to dismantle trade barriers and establish new strategic partnerships, rebuilding a relationship that has been strained. Carney's visit is the first by a Canadian prime minister since 2017 and follows months of diplomatic efforts to restore ties with Canada's second-largest trading partner.

Canadian Prime Minister Mark Carney and Chinese President Xi Jinping shake hands, marking a new trade agreement between the two nations.

Reversing Course on Electric Vehicle Tariffs

Under the new terms, Canada will allow up to 49,000 Chinese electric vehicles to be imported annually at a 6.1% tariff. This marks a sharp reversal from the 100% tariff imposed in 2024 by the former government of Justin Trudeau, which followed similar penalties enacted by the United States. In 2023, China exported 41,678 EVs to Canada.

"This is a return to levels prior to recent trade frictions, but under an agreement that promises much more for Canadians," Carney told reporters.

The Trudeau government had justified the high tariffs by citing an unfair global market advantage for Chinese manufacturers who benefited from state subsidies, which was seen as a threat to Canada's domestic auto industry.

However, Carney argued that a new approach is necessary. "For Canada to build its own competitive EV sector, we will need to learn from innovative partners, access their supply chains, and increase local demand," he said. The prime minister also stated he expects the agreement to attract "considerable" Chinese investment into Canada's auto sector, create high-quality jobs, and accelerate the country's transition to a net-zero economy through collaboration in clean energy.

A high-level meeting between Canadian and Chinese delegations set the stage for the landmark trade agreement.

Breakthrough for Canadian Agriculture Exports

The deal also provides a massive boost for Canadian farmers and fish harvesters, who were hit by retaliatory tariffs from China last year. In March 2025, after Trudeau's EV tariffs, China imposed duties on over $2.6 billion of Canadian agricultural products, which caused a 10.4% slump in Canadian goods imported by China that year.

Key agricultural concessions in the new agreement include:

• Canola Seed: Canada expects China to lower tariffs on its canola seed to a combined rate of approximately 15% by March 1. Carney described this as a "significant drop from current combined tariff levels of 84%" for a market worth $4 billion to Canada.

• Other Products: Anti-discrimination tariffs are expected to be removed from Canadian canola meal, lobsters, crabs, and peas starting March 1, lasting until at least the end of the year.

Carney projected that these changes will unlock nearly $3 billion in export orders for Canadian producers by allowing them to fully access the Chinese market.

A New Strategic Alignment

The Canada-China pact comes as both nations navigate a complex global trade environment, particularly concerning relations with the United States. Under President Donald Trump, the U.S. has imposed tariffs on some Canadian goods, creating friction with its longtime ally. China has also faced significant U.S. tariffs since Trump's return to office.

Prime Minister Mark Carney addresses the media, outlining the strategic benefits of closer trade ties with China.

When asked if China was now a more reliable partner than the United States, Carney emphasized the positive trajectory of the relationship.

"In terms of the way our relationship has progressed in recent months with China, it is more predictable, and you see results coming from that," he said. The deal positions Canada to deepen ties with the world's second-largest economy while diversifying its strategic partnerships.

France’s finance minister has issued a stark warning that a U.S. attempt to take control of Greenland could seriously damage trade relations with the European Union. Analysts suggest that any U.S. sanctions or tariffs aimed at pressuring Denmark could escalate into a full-blown trade war.

The controversy follows President Donald Trump's intensified discussions about annexing Greenland, the world's largest island. Recent talks on Wednesday involving the U.S., Denmark, and Greenland concluded without a diplomatic resolution.

France Warns of Economic Fallout

French Finance Minister Roland Lescure stressed that economic ties between Washington and Brussels are at risk if the Trump administration pursues the self-governing Danish territory.

"Greenland is a sovereign part of a sovereign country that is part of the EU. That shouldn't be messed around with," Lescure told the Financial Times on Friday.

When asked if the EU would retaliate with economic sanctions against a U.S. invasion of Greenland, Lescure avoided a direct confirmation but signaled a major strategic shift. "If that happened, we would be in a totally new world for sure, and we would have to adapt accordingly," he said.

US Strategic Interests in the Arctic

President Trump has framed the U.S. interest in Greenland as a matter of national security. According to analysts who spoke with CNBC, the move is also driven by a desire to secure emerging trade routes and gain access to critical minerals essential for industries like defense, keeping rivals at bay.

The heightened tensions come as a Democratic-led U.S. delegation prepares to meet with Danish lawmakers in Copenhagen.

Sanctions Could Trigger a Trade War

Experts believe that aggressive economic measures by the U.S. would provoke a strong European response.

"Significant economic pressure in the form of tariffs or sanctions on Denmark by the U.S. could likely mean a significant E.U. pushback," said Dan Alamariu, chief geopolitical strategist at Alpine Macro. He warned that the EU could "respond in kind, leading to a sort of trade war with the U.S. as well as constant headline risks."

Alamariu added that such a conflict would "rattle markets" and challenge the integrity of NATO, although he noted that internal political and market pressure would likely restrain the Trump administration.

Europe's Coordinated Response

In a clear show of solidarity, European troops arrived in Greenland on Thursday for a joint military exercise. Maria Martisiute, a policy analyst at the European Policy Centre, told CNBC this demonstrates that Arctic defense is an "allied effort" and not solely dependent on the U.S.

"If we want to reinforce veterans and defense in Greenland or the wider Arctic, it's not up to the U.S. It can be done via allied efforts," Martisiute explained, adding that the exercise sends a "powerful message."

The EU is also bolstering its financial commitment. The European Commission, the bloc's executive body, has proposed doubling its spending on Greenland in its latest draft budget.

European Commission President Ursula von der Leyen affirmed this support on Thursday, stating, "What is clear is that Greenland can count on us — politically, economically, and financially and when it comes to its security."

Yesterday was refreshing in the sense that we briefly went back to the optimistic, euphoric mood of the past three years, with AI dominating headlines for the right reasons — strong numbers from TSMC and a very strong market reaction.

TSMC was relatively timid during the Asian session, likely reflecting uncertainty around reports that Nvidia could face tariffs of up to 25% on H200 chip exports to China. There were also lingering concerns over US-Taiwan trade negotiations, with Washington pushing TSMC to invest more heavily in US-based chip manufacturing. That demand is not only costly upfront — the company is committing around $165bn to build six fabs — but would also raise operating costs by an estimated 30–50% compared with production in Taiwan.

Those worries largely evaporated once Western markets stepped in. AI-related stocks ended the day firmly higher: TSMC rose more than 4% in New York, ASML jumped 6% to a fresh record in Amsterdam, and VanEck's Semiconductor ETF gained around 2%.

Optimism was further boosted by news of a trade agreement between the US and Taiwan, reportedly bringing the tariff rate to 15%. The S&P 500 closed near record levels.

That said, it's worth noting that most candlesticks on my daily charts were red, suggesting the session was not outright positive. Early strength faded into the close as investors spent much of the day trimming gains and reassessing the news flow. Is the news really that good?

As we dive into the heart of earnings season in the coming weeks, tech results will be scrutinised in far greater detail. Recall that last earnings season delivered blowout headline numbers from Big Tech, but in some cases those figures were wearing a bit of make-up. Think Meta offloading the bulk of its AI data-centre financing to private credit players such as Blue Owl and Pimco — and Nvidia booking revenues that have not yet turned into cash.

Concerns around circular AI deals, leverage and delayed returns on investment remain front of mind for investors. These are compounded by rising electricity and metals costs, higher memory-chip prices, and the risk of supply disruptions — including China's threats to restrict rare-earth exports amid geopolitical tensions involving Iran and Venezuela, where China has historically sourced oil.

All of this suggests that this earnings season may not be a walk in the park. These "details" — or elephants in the room — will matter just as much as the shiny headline figures. AI stocks are valued to perfection and leave no room for error. As we head into earnings, it increasingly feels as though Big Tech's ability to impress is diminishing, a risk that matters given its outsized weight in equity indices. Recently, the S&P 500 fell despite around 300 stocks closing higher — it was tech that dragged the index down.

If that dynamic persists, and tech earnings fail to reignite investor enthusiasm, the rotation trade is likely to continue. The equal-weighted S&P 500 has been playing catch-up with the market-cap-weighted, tech-heavy version, while US small caps have outperformed the S&P 500 for a tenth consecutive session — something we haven't seen in a long time. That trend should continue as long as risk appetite remains intact.

For now, risk appetite is being supported by renewed Federal Reserve (Fed) liquidity. A small but notable uptick in the Fed's balance sheet suggests the central bank is back in the market — not buying the same assets as before, but adding liquidity nonetheless. And liquidity always has to find a home.

Banks kicked off earnings season this week with broadly positive results. While price action earlier in the week failed to reflect those results — with markets focused on the White House's proposed 10% cap on credit-card interest rates — Goldman Sachs and Morgan Stanley reversed selling pressure yesterday with blockbuster numbers. Both posted record revenues, and both stocks hit all-time highs. Their long-term charts now make the 2008 drawdown look almost insignificant.

One of the biggest energy boosts for banks right now is AI — and we've been saying it all along: AI is not just a tech story. Goldman's CEO pointed to the "tremendous public and private capital" flowing into AI (surprised?), while Morgan Stanley's CFO noted that "the need for capital-markets and structuring expertise across the AI ecosystem is clearly there." Hell yeah —look at Meta, structuring debt in a way that makes its balance sheet look like a fresh sheet of paper.

The risk, however, is that investors now want returns — and they want them before AI infrastructure risks becoming outdated.

Zooming out briefly to macro data: the Philly Fed and Empire Manufacturing indices surprised to the upside yesterday, while US initial jobless claims fell last week. That combination suggests the Fed may be in no rush to cut rates further. The US 2-year yield, which captures rate expectations, climbed to a five-week high, pushing the dollar index toward the 100 mark. Crude oil fell sharply — around 4% — on signs of de-escalating tensions around Iran, while precious metals retreated. That said, the hammer formation in silver suggests dip-buyers remain active, and I still expect a move toward $100 per ounce before a more meaningful pullback.

There is little doubt that a 10–20% correction will hit at some point — the question is when. Over the medium term, the debasement trade should continue to weigh on the dollar and support metals prices.

Finally, for investors concerned about a commodity-led inflationary cycle, building exposure to commodities remains one of the most effective hedges.

Source: Swissquote Bank SA