Overseas markets exhibited a clear decline in risk appetite prior to the holiday. However, during the extended break, global commodity markets rebounded, with precious metals such as gold, silver, platinum, and palladium trending higher. Crude oil prices saw a significant recovery, which in turn bolstered the strength of overseas oilseed and meal markets. The current market drivers stem from an interplay of geopolitical, policy, and economic factors: a. Marginal changes in conflicts in the Middle East and other regions, impacting prices of crude oil and chemical products; b. Adjustments to US tariff policies, leading to a renewed increase in policy uncertainty; c. US economic data suggesting a trend towards "stagflation," creating divergent narratives for the future path of monetary policy.
On the geopolitical front, US military movements in the Middle East have already introduced a risk premium into crude oil prices. The conflict between Israel and Iran in June 2025 previously led to a notable rise in oil prices. Currently, the deployment of the USS Gerald R. Ford aircraft carrier to the Middle East signifies a continued strong US military presence in the region. Amidst US-Iran negotiations, this action serves both as military pressure on Iran and preparation for potential conflict. Prediction markets, such as Polymarket, indicate a significantly increased probability of a US strike on Iran before the end of March.
It is important to note that the crude oil market has already partially priced in the possibility of conflict. Such events typically cause a sharp, short-term price spike upon eruption, but prices often retreat after the situation calms, potentially even erasing the pre-conflict risk premium. Furthermore, products like methanol and MEG are susceptible to disruptions in Iranian exports, warranting attention to short-term impacts from changing geopolitical dynamics.
Another consideration is whether the previously sustained low oil price environment of 2025, influenced by slowing OPEC+ production increases and the Trump administration's relaxation of climate constraints, is beginning to ease. Current US crude oil inventories remain at low levels for this time of year, coupled with high refinery utilization rates, indicating solid underlying demand support. In this context, geopolitical events could amplify the upward volatility of oil prices.
Policy uncertainty has become a constant feature. The US Supreme Court ruled that the International Emergency Economic Powers Act (IEEPA) does not grant the President the authority to impose tariffs directly, bypassing Congress. This undermines the legal basis for the "reciprocal tariffs" previously levied by the Trump administration. The White House's response has been to impose a temporary 10% import tariff using Section 122 of the Trade Act of 1974. Subsequently, on the 21st, Trump announced an increase of this tariff to 15%, effective February 24th.
However, given that markets spent much of 2025 trading based on the erratic nature of US tariff policy, the marginal impact of this specific rate change may be limited. Firstly, tariffs imposed under Section 122 can last a maximum of 150 days without Congressional approval for an extension. Secondly, tariffs on key industrial inputs like steel and aluminum were already in place under Sections 232 and 301. The Supreme Court's ruling primarily affects the *methods* available to Trump for imposing future tariffs, rather than eliminating his use of tariffs as a bargaining chip in negotiations.
Several key questions require re-examination: A. The legal foundation for US trade policies using "reciprocal tariffs" as leverage has been weakened, potentially increasing trade uncertainty due to potential agreement adjustments. B. Whether this ruling impedes the progress of investment projects under the OBBB Act, which was passed with tariff revenue as a bargaining chip. C. The potential for refunds of tariffs increased in 2025, including the timing and mechanism. D. Despite Trump appointing six of the nine Supreme Court justices, the Court ruled against his position. Does this signal internal divisions within the Republican party, and will key appointments, like the new Fed Chair, align with Trump's wishes? E. Following a historical pattern of "distraction," might Trump escalate pressure overseas to divert attention from domestic policy setbacks?
We assess that the current increase in "Section 122 tariffs" will have a limited impact on inflation. The effective marginal change in tariff rates is constrained (capped at 15%), and exemptions exist for various critical minerals, precious metals, energy products, agricultural goods, and automobiles, suggesting a relatively muted effect on consumer prices. While 2025 US tariff policy exerted upward pressure on inflation, this was partially offset by falling oil prices. Under the pressure of the midterm elections, and considering voter focus on "affordability," the likelihood of the administration implementing further significant tariff hikes appears relatively low.
Inflation risks persist, and signs of US stagflation are re-emerging. Following substantial downward revisions to non-farm payroll data, US Q4 GDP and PCE figures also showed weakness. The annualized Q4 real GDP growth was approximately 1.4%, while core PCE rose 0.4% month-on-month in December, reaching 3% year-on-year. The prolonged government shutdown in Q4 2025 undoubtedly impacted the economy, but overall growth still fell below market expectations. A disconnect remains between the previously lower CPI readings and the PCE data.
Reviewing the January FOMC meeting minutes reveals that the Federal Reserve's primary concern remains inflation risks. However, risk assets, exemplified by US equities, are focused on economic growth prospects and the sustainability of tech-related capital expenditure. As previously discussed, the correlation between US stocks and precious metals, the investment narrative, and copper demand logic may persist in an environment where "stagflation" has not been decisively refuted, leading to a period of synchronized movement between overseas equities, precious metals, and base metals. Nevertheless, risks outside the commodity markets warrant vigilance, such as vulnerabilities in the US private credit sector, banking system, and technology companies, which could trigger a sharp decline in risk appetite.
The future path of Federal Reserve interest rates has become more ambiguous. This stems partly from a more balanced composition of perceived "dovish" and "hawkish" influences among incoming Fed Governors, making it harder to predict overall policy direction from individual members' views. Additionally, the recent statements from the nominee for Fed Chair, Kevin Warsh, remain unclear. The Fed's methods for guiding market expectations might change, potentially leading to a shift in trading patterns.
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