News of the week summary- 26/01/2025
Trump pushes for lower interest rates and oil prices
Donald Trump used his address at the World Economic Forum in Davos to push for lower oil prices and immediate interest rate cuts, while also advocating for sweeping economic policies aimed at boosting U.S. manufacturing and energy production. He urged Saudi Arabia and OPEC to reduce crude oil prices, arguing that high energy costs were prolonging Russia’s invasion of Ukraine. Trump suggested that a lower oil price could bring an end to the conflict and announced that once this was achieved, he would demand a global reduction in interest rates, starting with the Federal Reserve. His comments came after a conversation with Saudi Crown Prince Mohammed bin Salman, who pledged up to $600 billion in U.S. investments over the next four years, though Trump said he would push for this to reach $1 trillion. Following his remarks, crude prices fell by 1%.
Trump also reiterated his strong support for domestic manufacturing, warning that companies that fail to produce goods in the U.S. would face heavy tariffs. He promoted what he called a "revolution of common sense," promising the largest tax cuts in American history and radical deregulation to stimulate economic growth. Additionally, he defended coal as a key energy source for the artificial intelligence industry, claiming that the U.S. would need to double its current energy capacity to support AI development. He pledged to use emergency decrees to fast-track power plant construction, emphasizing that coal was a reliable, indestructible energy source. Following his endorsement, shares in Peabody, the largest U.S. coal company, surged 4%.
In terms of foreign policy, Trump expressed optimism about working with China and its President Xi Jinping, blaming Joe Biden for the deterioration in U.S.-China relations. He suggested that Beijing could play a role in resolving the Ukraine war and called for a fairer trade relationship. However, he was sharply critical of the European Union, condemning its regulatory actions against U.S. tech companies as a disguised form of taxation. He hinted at retaliatory measures, referencing a Financial Times report that he had threatened to double tax rates on foreign nationals and businesses operating in the U.S. in response to what he sees as discriminatory EU policies against American multinational corporations.
Trump’s remarks highlighted his broader economic strategy of protectionism, deregulation, and energy independence, alongside an aggressive stance on monetary policy and trade negotiations. His calls for lower oil prices and interest rates suggest a focus on boosting economic growth through cheaper energy and looser financial conditions, though his proposed policies could provoke tensions with international trade partners and central banks.
Bank of Japan raises rates to highest level in 17 years
The Bank of Japan has raised its short-term policy rate by 25 basis points to 0.5 percent, the highest level since the 2008 financial crisis. This move comes in response to persistent inflationary pressures and accelerating wage growth, signaling a departure from Japan’s long-standing ultra-loose monetary policy.
Inflation in Japan has remained elevated, with the core consumer price index rising by 3.0 percent in December, its fastest pace in 16 months. Higher food and energy costs continue to drive price increases, prompting the BOJ to revise its inflation forecast upward. Governor Kazuo Ueda emphasized that steady wage growth has allowed companies to pass costs onto consumers, reinforcing the central bank’s decision to tighten policy. While the BOJ remains cautious, it has indicated that further rate hikes will be considered based on incoming economic data.
Financial markets reacted swiftly to the announcement. The yen briefly strengthened to 154.845 per dollar, while Japan’s two-year bond yields surged to their highest level since 2008. Investors are now expecting another 25-basis-point hike by the end of the year. In the global context, the BOJ has downplayed overseas risks, citing strong economic growth in the United States as a supportive factor. However, uncertainties remain regarding potential policy shifts under a second Trump administration, particularly concerning trade and tariff measures that could impact Japan’s export-driven economy.
Analysts predict that the next rate hike could come between July and September, with another possible increase in early 2026. This marks a historic shift from Japan’s decades-long commitment to near-zero interest rates as the BOJ moves toward normalizing borrowing costs while carefully balancing inflation risks and economic stability.
Argentina's credit rating improves
Moody’s, one of the world's three biggest credit rating agencies, has upgraded Argentina’s long-term foreign currency sovereign credit rating from "Ca" to "Caa3," citing the government’s aggressive policy shift that has helped stabilize external finances and restore investor confidence. This marks the first upgrade in five years, reflecting the impact of President Javier Milei’s economic measures, including fiscal tightening, reduced monetary financing, and a record $18.9 billion trade surplus in 2024. These steps have been crucial in addressing economic imbalances, cooling inflation, and ensuring Argentina meets its debt obligations. Moody’s also revised Argentina’s outlook to “positive” from “stable,” signaling confidence in the country's ongoing macroeconomic stabilization.
This improved rating comes as Argentina engages in negotiations with the International Monetary Fund (IMF) for a new debt deal. The government is seeking additional funds beyond the $44 billion renegotiated in 2022, aiming to further strengthen market confidence and bolster the central bank’s foreign currency reserves. The IMF has acknowledged Argentina’s progress, with Managing Director Kristalina Georgieva noting that the country’s fiscal deficit has been eliminated, inflation is decreasing, and economic growth is rebounding. This assessment has fueled optimism that a fresh agreement could provide Argentina with the liquidity needed to solidify its recovery.
The outcome of these negotiations will be crucial in shaping Argentina’s debt outlook, as securing additional funds could provide the government with the necessary resources to sustain its economic reforms while avoiding financial instability. If successful, the deal, alongside Argentina’s credit rating upgrade, could mark a turning point for the country’s long-term economic trajectory.
Gold nears all-time high
Gold prices climbed over 1% on Friday, approaching their record high from October, as a weakening dollar and growing economic uncertainty spurred demand for the metal. Spot gold rose to $2,772.79 per ounce, just $17 away from its all-time high. U.S. gold futures also rose, settling at $2,778.90 per ounce. The rally was driven in part by President Donald Trump’s recent calls for lower interest rates and the uncertainty surrounding potential new tariffs on Mexico, Canada, China, and the European Union, which he suggested could be announced on February 1. These factors increased market speculation about inflation and the Federal Reserve’s potential response, reinforcing gold’s appeal as a hedge against economic instability.
The price of gold tends to move inversely to the strength of the U.S. dollar. When the dollar weakens, as it did in response to Trump’s policy comments, gold becomes more attractive to investors who hold other currencies because it becomes cheaper for them to purchase. This increased demand pushes gold prices higher. Conversely, when the dollar strengthens, gold becomes more expensive for foreign investors, reducing demand and leading to lower prices.
Gold is often considered a "safe haven" asset, meaning investors turn to it in times of economic uncertainty, inflationary pressures, or geopolitical risks. Unlike paper currencies, which are subject to central bank policies such as interest rate cuts or inflationary devaluation, gold retains intrinsic value and is not tied to any one government’s monetary system. This characteristic makes it a reliable store of wealth, particularly when financial markets experience turbulence.
In the current climate, with Trump advocating for interest rate cuts and potential trade conflicts looming, gold’s appeal is further enhanced. Lower interest rates generally reduce the opportunity cost of holding gold, which does not generate interest or dividends. When rates are low, investors are less incentivized to keep their money in interest-bearing assets like bonds, making gold a more attractive alternative. Additionally, concerns about inflation stemming from potential tariffs and a looser monetary policy drive investors toward gold as a hedge against the declining purchasing power of paper currencies.
With attention now shifting to the Federal Reserve’s upcoming meeting and potential trade policy announcements, the outlook for gold remains closely tied to economic developments. If inflation fears persist and the Fed signals a more accommodative stance, gold prices could continue their upward trajectory, solidifying their status as a preferred asset during times of market uncertainty.