Key Highlights

• The U.S. raises tariffs on South Korean imports to 25%.
• President Trump signals U.S. security guarantees for Ukraine hinge on Donbas concessions.
• India and the EU reach a free trade agreement.

Chart of the Day

South Korean asset holdings likely to shrug off tariff fears

^{Source: BNY}

KRW underperformed overnight following an unexpected U.S. tariff threat of up to 25%, which reintroduced uncertainty around South Korea’s external outlook. That said, broader domestic sentiment remains constructive. A sharp rebound in the Composite Business Sentiment Index, a resilient KOSPI (+1.9%) and recent policy measures – including increased domestic equity allocation by the National Pension Service (NPS) – should provide a supportive backdrop.

We continue to expect KRW normalization toward the 1420 zone, and the currency has maintained its status as the best-held currency in iFlow. Although foreign flows reversed from net selling to net buying of KOSPI this morning, the sustained strength in KRW holdings indicates that amid the recent surge in South Korean equities – where holdings have reached 40% above the rolling 12-month average – hedging interest is becoming increasingly light. As U.S. rates stand to fall further, the incentive to hedge KRW exposures will decline even more, as is currently the case with many funding currencies in the region. The recent appreciation by JPY will also open up some space for KRW and its peers to strengthen; however, we acknowledge that all central banks in the region are disincentivized to become the “first mover” in correcting valuations.

What's Changed?

Investors have dug out from the snow, pushing global stocks back toward record highs, led by technology, while also buying gold and silver. Risk is on, but this is still a cold market. Ongoing rate check worries are driving JPY, but the return of tariffs has hit KRW. Overall, USD is flat with fiat currency debasement making FX a carry game, as illustrated by gains for INR, ZAR and MYR. The biggest focus has been on rates, where 10y JGB yields are up 5.5bp. That leaves EU and U.S. bonds offered, with eyes on Germany’s 20y sale and the U.S. 5y sale later today. Central bank decisions and President Trump’s pick for FOMC chair add to the short-end uncertainty.

Japan and intervention. The move from 154.85 to 153.35 was the excitement in London trading this morning, after a quiet APAC session where JPY weakness tracked KRW and the broader USD recovery. Volumes in JPY remain elevated, and 152 looks to be the line in the sand for derivative markets. The JGB moves were more problematic, and there was rising talk of the Government Pension Investment Fund allocating more to Japanese bond holdings as a stabilizing factor. This would mirror the pressure exerted by the National Pension Service in South Korea. The rapid and volatile moves in JPY remain problematic and suggest more action is needed for stability overall.

Credit out of focus. The markets are focused on Q4 earnings, particularly for big technology, along with investment plans and funding needs. The IG squeeze-out from hyperscalers remains a worry, but the K-shaped economy and higher consumer defaults continue: Apollo has reported a 100% loss on $170mn in asset-backed financing for Amazon brand aggregator Perch. The FT reports the ongoing rise of “continuation funds,” where private credit sells loans from old funds to new ones. Rate policy, IPOs and economic growth hopes remain part of the credit story ahead.

Commodity and M&A links. Glencore and M&A is a key story for 2026 given talks with Rio Tinto. Mining and delivering the supply of industrial and precious metals to feed the current demand requires scale. The focus on gold and silver remains high, as does their own price uncertainty. Calls that precious metals are in a bubble and will collapse are rising, but underneath the uncertainty is more demand, with global retail and strategic stockpiling the drivers. Correlations between metals and stocks are becoming reflexive, adding to liquidity risks ahead.

Bottom line: The U.S. session gets underway with high hopes of more gains across stocks, tracking dollar stability and stable bonds. Ranges rather than records matter to keeping investors’ rebalancing plans from skidding in slippery month-end liquidity. There is also an onslaught of economic data, with the key focus on jobs, particularly the ADP weekly numbers and the Conference Board’s measure of easy vs. hard-to-get jobs. Markets will be watching to see if President Trump jumps ahead of the FOMC decision and picks his replacement for Jerome Powell. Odds-making about Tuesday Turnarounds in mood is like weather forecasting: unlikely to matter until the actual precipitation falls. Watch USD and silver for big reversal risks. 

What You Need to Know

President Trump has raised tariffs on South Korean imports to 25%, from 15%, accusing Seoul of failing to deliver on a trade deal agreed last October. The higher levies cover automobiles, lumber, pharmaceuticals and other reciprocal tariffs, with Trump arguing Washington had already reduced duties while South Korea’s legislature moved too slowly on ratification. Seoul said it had not received formal notice and sought urgent talks, with Industry Minister Kim Jung-kwan planning to visit Washington to meet Commerce Secretary Howard Lutnick. South Korean equities initially fell before recovering. The episode underscores Trump’s continued use of tariffs as foreign policy leverage, following recent threats involving Canada, China, Greenland and other U.S. partners. KOSPI +2.733% to 5084.85, USDKRW +0.212% to 1445, 10y KTB -3.5bp to 3.545%.

The Trump administration has told Ukraine that U.S. security guarantees would depend on Kyiv first reaching a peace deal with Russia that could involve conceding the Donbas region, according to people familiar with the talks. Ukrainian officials say Washington is using the promise of postwar security and additional weaponry to push President Volodymyr Zelenskyy toward territorial compromises long seen as a red line in Kyiv. While U.S. officials publicly deny forcing concessions, they acknowledge guarantees hinge on a peace agreement being reached. The stance has unsettled Ukrainian and European officials, who fear Ukraine is being pressured into accepting Moscow’s core demands, even as negotiations continue following recent trilateral talks involving the U.S., Ukraine and Russia. PFTS 0% to 461.21, USDUAH -0.004% to 43,10y UGB +0.8bp to 13.227%.

India and the EU have concluded negotiations on a long-awaited free trade agreement, said EU President Ursula von der Leyen and India’s Commerce Secretary Rajesh Agrawal, with a formal announcement expected on January 27. The deal is set to significantly reduce Indian tariffs on cars, machinery and selected agricultural products, including wine and spirits, while expanding cooperation in services such as telecoms, maritime and financial services. EU trade chief Maroš Šefčovič described the agreement as opening a new chapter in bilateral cooperation, particularly in automotive and industrial sectors. The breakthrough comes during an EU leadership visit to India and after years of stalled talks, as both sides seek to strengthen trade ties amid pressure from U.S. tariffs and competition from Chinese exports. SENSEX +0.017% to 81551.66, USDINR -0.272% to 91.71, 10y INGB +2.7bp to 6.691%.

Prime Minister Sanae Takaichi said Japan’s security alliance with the U.S. would “collapse” if Tokyo failed to act during a Taiwan emergency in which American forces were attacked while jointly evacuating citizens. Speaking during an election debate, Takaichi stressed her comments did not mean Japan would automatically take military action in a U.S.-China clash. However, she argued Japan could not retreat if its ally came under attack and would respond within existing legal limits. Her remarks reinforced earlier statements that inflamed tensions with Beijing, prompting Chinese travel warnings, trade curbs and export restrictions. While defending her stance as consistent with past policy, Takaichi has sought to keep diplomatic channels open, reiterating her willingness to pursue dialogue with China’s leadership amid a closely fought election campaign. Nikkei +0.848% to 53333.54, USDJPY +0.247% to 154.56, 10y JGB +5.4bp to 2.292%.

Internal tensions within the U.K.’s ruling Labour party have escalated. Around 50 Labour MPs have written to Prime Minister Sir Keir Starmer urging him to overturn a decision blocking Greater Manchester Mayor Andy Burnham from standing in the upcoming Gorton and Denton by-election. The signatories warned the move could hand an advantage to Reform U.K. and argued Burnham was Labour’s strongest potential candidate, with “no legitimate reason” for his exclusion. Labour’s National Executive Committee defended the decision, saying it would avoid the cost and disruption of a mayoral by-election should Burnham win, and allow resources to be focused elsewhere. Burnham remains a possible future leadership challenger to Starmer. FTSE 100 +0.053% to 10148.85, GBPUSD +0.059% to 1.3688, 10y gilt -1.5bp to 4.497%.

What We're Watching

The National Bank of Hungary is expected to keep rates unchanged at 6.50%, but a vigilant tone on inflation is needed as wage growth remains high.

The Banco Central de Chile is expected to keep rates unchanged at 4.5%, but there is some scope for a dovish bias given recent improvement in terms of trade.

U.S. weekly ADP employment change (January 3) expected at 5,000k, with the 4-week average down from 8,000k but likely skewed by holiday noise.

U.S. November FHFA house price index forecast up 0.3% m/m from 0.4% in October.

U.S. November S&P Cotality CS 20-city forecast up 0.2% m/m, 1.2% y/y from 0.32% m/m, 1.31% y/y in October.

U.S. January Richmond Fed manufacturing index expected to improve to -5 from -7.

U.S. January Conference Board consumer confidence is expected to improve to 90.6 from 89.1, with the key focus the percentages reporting that jobs are easy or hard to get.

U.S. Treasury sells $90bn in 6-week bills and $70bn in new 5y notes.

What iFlow is Showing Us

Mood: iFlow Mood has stabilized at an elevated level of 0.415, driven by continued demand for equities and persistent outflows in core sovereign bonds.

FX: Mixed and relatively calm session despite rising market volatility. JPY posted marginal outflows, along with ILS, HUF and INR. COP and PEN saw the most inflows, followed by CNY, EUR and ZAR.

FI: Notable flows were strong buying of Japanese government bonds versus selling of Indonesia government bonds. Elsewhere, G10 government bonds were bid against mixed flows in LatAm and APAC, while EMEA government bonds were sold.

Equities: European, South African and Indian equities were significantly sold, against strong demand for South Korean and Malaysian equities, followed by Czechia and Peru.

Quotes of the Day

“When you find yourself in a hole, stop digging.” – Will Rogers

“If you dig a hole and it’s in the wrong place, digging it deeper isn’t going to help” – Seymour Chwast 

Economic Details

France’s January consumer confidence was unchanged at 90, remaining below its long-term average of 100, according to INSEE’s monthly household survey. Households’ assessment of their future personal financial situation improved slightly, with the associated balance rising by one point, while views on past financial conditions were flat at their long-term average. The share of households considering it a good time to make major purchases was broadly stable, though the balance edged one point lower and remained below its historical norm. Perceptions of saving opportunities declined, with the related balance falling four points but remaining well above average. Expectations of the future standard of living in France were broadly stable and still well below their long-term average, while unemployment concerns were unchanged and high. Inflation expectations increased, with more households anticipating faster price rises over the next 12 months. CAC 40 -0.146% to 8131.15, EURUSD -0.051% to 1.1874, 10y OAT +0.6bp to 3.443%.

The Spanish labor market strengthened in Q4 as employment rose and unemployment fell, showed the Labor Force Survey. Employment increased by 76,200 q/q to 22.46 million, while the seasonally adjusted quarterly growth rate was 0.9%. Over the whole of 2025, employment rose by 605,400. Unemployment fell 136,100 q/q to 2.48 million, lowering the jobless rate to 9.93% from 10.45%. The seasonally adjusted unemployment rate was down 1.0%. Job gains were concentrated in services, agriculture and construction, while industry shed jobs. Full-time employment fell q/q, offset by a sharp rise in part-time work. The active population shrank slightly q/q but increased strongly over the full year. IBEX 35 +0.349% to 17775, EURUSD -0.051% to 1.1874, 10y Bono +0.8bp to 3.237%.

U.K. shop price inflation accelerated to 1.5% y/y in January, from 0.7% y/y in December, according to the British Retail Consortium. This marks the highest reading since February 2024. The increase reflected higher business energy costs and the continued pass-through of higher national insurance contributions. Food inflation rose to 3.9% y/y from 3.3% y/y, driven by stronger price growth in meat, fish and fruit, amid weaker supply and firmer demand. Non-food prices increased by 0.3% y/y after contracting by 0.6% y/y previously, the first positive reading since early 2024, with the furniture, flooring, and health and beauty categories recording gains. The BRC index provides an early signal ahead of official inflation data due later in February.

Sweden’s December producer prices fell sharply, with the Producer Price Index down 1.1% m/m and 2.7% y/y, compared with -1.4% y/y in November. Prices decreased across all markets, falling 1.0% m/m on the domestic market, 1.3% m/m on the export market and 1.1% m/m on the import market. The domestic m/m decrease was driven mainly by lower electricity trade service prices, alongside weaker refined petroleum and basic chemical prices. On a y/y basis, domestic prices rose 1.2%, while export and import prices fell by 6.5% and 6.7%, respectively. Energy-related producer prices declined by 2.8% y/y, while consumer and capital goods prices fell 1.6% y/y and 2.5% y/y. OMX +0.349% to 3024.151, EURSEK -0.09% to 10.6077, 10y Swedish GB +0.7bp to 2.926%.

Sweden’s December trade balance recorded a surplus of SEK 7.4bn, as exports rose 1% y/y to SEK 162.4bn while imports fell 3% y/y to SEK 155.0bn. The surplus widened from SEK 2.3bn in December previously, supported by a stronger performance relative to imports, with one additional working day compared with a year earlier. Trade with non-EU countries generated a surplus of SEK 30.0bn, offsetting a SEK 22.6bn deficit in trade with EU partners. For the full year, Sweden’s net trade surplus widened to SEK 74.1bn, up from SEK 63.4bn previously, as exports declined 1% y/y to SEK 2,042.8bn and imports fell 2% y/y to SEK 1,968.7bn.

Sweden’s November goods trade saw exports fall 6% y/y in value terms while remaining flat y/y in volume terms, as imports dropped 8% y/y by value and 4% y/y by volume. On a m/m basis, exports decreased by 4% in value terms and 5% by volume, while imports fell 8% by value and 9% by volume, in part because there were three fewer working days than in October. By product, exports of wood and paper products were down 10% y/y by value, with paper and paper products down 17% y/y. Mineral fuels exports dropped 33% y/y by value, led by a 40% y/y fall for petroleum products. On the import side, machinery and transport equipment fell 9% y/y by value, while passenger car imports decreased by 26% y/y.

Poland’s labor market ended the year with stable but softening conditions, according to Statistics Poland’s Statistical Bulletin. Average paid employment in the national economy was slightly lower y/y, with the employment index at 99.1 for 2025, indicating a modest contraction compared with the previous year, while m/m changes were limited. In the enterprise sector, employment trends weakened in industry and construction, partly offset by services. Registered unemployment remained broadly stable at year-end, with the unemployment rate little changed from previous months, although job offer data were affected by methodological changes introduced in June. Labor Force Survey results pointed to largely unchanged activity and employment rates among those aged 15-89. Wage dynamics remained strong, with average monthly gross wages up 11.3% y/y in 2025, supporting household income despite softer employment momentum. WIG Index +0.03% to 124206.70, EURPLN -0.04% to 4.2062, 10y PGB +0.8bp to 5.115%.

Poland’s December industrial production showed mixed performance across major product groups, with y/y output increases recorded for 244 manufactured items and declines for 228. Over the full year, manufactured production rose for 231 products and fell for 240, underscoring a broadly uneven industrial recovery. Output gains were notable in energy-related products, selected food items, chemicals, plastics, basic metals, machinery and transport equipment, while sharp declines were recorded in coal, selected foodstuffs, apparel, chemicals, metal products and passenger cars. Sold production followed a similar pattern, with increases for 172 products and declines for 148 over the year. Overall, the data point to sector-specific strength alongside persistent weakness in consumer-facing and automotive segments.

South Africa’s composite leading business cycle indicator in November increased by 1.4% m/m and 3.3% y/y. This was supported by gains in eight out of ten components, led by stronger six-month smoothed growth in real M1 money supply and job advertisement space. Negative contributions came from a narrower interest rate spread and weaker growth in new passenger vehicle sales. The composite coincident indicator in October rose 0.3% m/m and was flat y/y, reflecting higher industrial production and improved wholesale, retail and motor trade sales. By contrast, the composite lagging indicator in October fell 0.4% m/m and declined by 0.2% y/y, indicating ongoing weakness in retrospective economic conditions. JSE TOP 40 -0.05% to 116651, USDZAR -0.173% to 16.0213, 10y SAGB +0.7bp to 8.117%.

Japan’s Services Producer Price Index (SPPI) rose 2.6% y/y in December (November: 2.7%), with prices flat m/m, signaling a mild deceleration but still-elevated services cost pressure. Excluding international transportation, SPPI increased by 2.7% y/y and was unchanged m/m, showing that underlying domestic services inflation remains sticky. By contribution, other services remained the largest driver (+1.28 percentage points), led by civil engineering and architectural services (+6.5% y/y) and worker dispatching services (+2.9% y/y); this reflects continued pass-through of labor costs. Information and communications (+0.59 percentage points) was supported by software development, while transportation and postal activities (+0.40 percentage points) saw mixed dynamics as ocean freight rebounded (+5.3% y/y) but road freight eased (+2.8% y/y). Overall, the data point to persistent but gradually cooling services inflation.

Japan’s December semiconductor equipment billings fell 4.5% y/y but rose 0.7% m/m, reaching ¥423.487bn on a three-month moving average basis, reported the Semiconductor Equipment Association of Japan. December’s y/y decline followed a 3.7% y/y increase in November, while the m/m gain slowed from 1.6% m/m previously. Billings remained below the December 2024 level of ¥443.364bn. Earlier in the year, y/y growth had been stronger, reaching 18.1% in July and 14.9% in September before decelerating into year-end. The data track global billings of Japan-based manufacturers of semiconductor manufacturing equipment rather than semiconductor device sales. All figures are based on preliminary December data published by the association.

Japan’s December machine tool orders rose 10.9% y/y, accelerating from 14.8% y/y in November, according to revised data from the Japan Machine Tool Builders’ Association. On a m/m basis, total orders increased by 15.8%. Domestic orders were flat y/y after contracting by 6.8% y/y previously, while foreign orders rose 15.1% y/y, following a 23.6% y/y increase in November. By sector, orders from industrial machinery increased 5.1% y/y, while auto-related orders rose 4.7% y/y. In contrast, electrical and precision machinery orders declined by 19.1% y/y, and metal products fell 13.2% y/y. In value terms, total orders came to ¥158.6bn in December, with foreign demand accounting for the bulk of the increase.

Australia’s December NAB business conditions picked up as sales and profits improved, while limited spare capacity at firms suggested the economy could be bumping up against its speed limit. The survey from National Australia Bank showed its index of business conditions rose 2 points to +9 in December, having fallen 3 points the previous month. The survey’s volatile measure of business confidence edged up 1 point to +3. The measure of sales gained 3 points to a historically strong +16, adding to other signs of a revival in consumer demand late last year. The index of profits added 3 points to +7, while employment held steady at +4. The measures of prices ticked higher in the three months to December, while capacity utilization eased only a touch to a still-elevated 83.2%. ASX +0.064% to 5478.52, AUDUSD +0.073% to 0.6922, 10y ACGB +2.7bp to 4.845%.

China’s industrial enterprises above designated size saw 0.6% profit growth in 2025, reversing three years of decline. Manufacturing profits rose 5.0% y/y to ¥5.692tn and power supply grew 9.4% y/y to ¥872.1bn, while mining fell 26.2% y/y to ¥834.5bn. December profits rebounded by 5.3% y/y vs. -13.1% y/y in November. Equipment manufacturing profits grew 7.7% y/y, contributing 2.8 percentage points to overall growth, with key sectors such as rail, aerospace and electronics recording double-digit gains. High-tech manufacturing profits surged 13.3% y/y, led by smart electronics and semiconductors. Traditional industries also improved, with biochemical and bio-based sectors outperforming averages. Small, foreign and state-owned enterprises saw a recovery in profit growth. CSI 300 -0.027% to 4705.69, USDCNY +0.042% to 6.9571, 10y CGB +0.2bp to 1.826%.

South Korea’s Composite Business Sentiment Index (CBSI) for all industries was 94.0 in January 2026, down 0.2 points from December 2025, while the outlook for February rose 1.0 points to 91.0. Manufacturing CBSI increased by 2.8 points to 97.5, with the outlook up 1.0 points to 95.0. Non-manufacturing CBSI fell 2.1 points to 91.7, but the outlook rose 1.0 points to 88.4. The Economic Sentiment Index (ESI) rose 0.5 points to 94.0. Manufacturing production (87 vs. 82 in December) and new orders (83 vs. 78 in December) improved, while non-manufacturing profitability and the financial situation deteriorated slightly. The survey covered 3,255 companies across manufacturing and non-manufacturing sectors. KOSPI +2.733% to 5084.85, USDKRW +0.212% to 1445, 10y KTB -3.5bp to 3.545%.

Taiwan’s December business conditions strengthened further, with the overall monitoring indicator flashing “red” as the total score rose to 38 points from 37, the National Development Council has reported. The trend-adjusted leading index increased by 1.10% m/m to 103.36 points, extending gains to a fifth consecutive month, supported by improvements in export orders, equity prices and manufacturing indicators. The coincident index rose 0.35% m/m to 105.38, marking a fourteenth straight monthly increase, reflecting firmer industrial production, exports and domestic sales. The lagging index also increased, rising 0.26% m/m to 99.04, its sixth consecutive gain. Overall, the indicators point to broad-based economic momentum into year-end, prompting authorities to closely monitor developments. TAIEX +0.79% to 32317.92, USDTWD -0.185% to 31.441, 10y TGB -0.6bp to 1.4%.

The Philippines’ external trade strengthened in December 2025, with total goods trade rising 13.0% y/y to $17.51bn. This was driven by a sharp rebound in exports (+23.3% y/y to $6.99bn vs. 21.6% y/y in November) that outpaced import growth (+7.1% y/y to $10.52bn, vs. 2.3% y/y in November). The trade deficit consequently narrowed to $3.52bn (-15.0% y/y). Export momentum was led by electronics ($4.04bn or 57.8% of total exports). This was followed by other manufactured goods with an export value of $320.06mn, and machinery and transport equipment at $295.57mn. Full-year 2025 exports totaled a record $84.41bn (+15.2% y/y). The U.S. ($1.1bn, 15.7% of total exports), Hong Kong ($1.05bn, 15.1%), Japan ($975mn, 14%), China ($790mn, 11.3%) and Singapore ($329mn, 4.7%) were the top destinations, with APEC absorbing 81.7% of exports. The fastest-growing import categories were electronics ($2.66bn, 25.3% share), mineral fuels and transport equipment, while capital goods were the largest category (33.6%). For 2025, imports totaled $133.57bn (+4.7% y/y), underscoring a year marked by strong export performance and a gradual improvement in the trade balance despite still-elevated import demand. PSEi +0.526% to 6306.9, USDPHP +0.173% to 59.075, 10y PHGB -0.2bp to 5.948%.

Hong Kong’s December merchandise trade saw exports surge 26.1% y/y while imports rose 30.6% y/y, resulting in a trade deficit of $63.3bn, equivalent to 11.0% of imports. Export growth accelerated from 18.8% y/y in November, lifting total exports to $512.8bn, while imports increased to $576.0bn. For 2025 as a whole, exports increased by 15.4% y/y and imports rose 15.5% y/y, producing an annual trade deficit of $446.6bn. On a seasonally adjusted basis, Q4 exports increased by 5.2% q/q and imports rose 6.7% q/q. Export growth was broad-based across Asia and the U.S., led by electrical machinery and telecommunications equipment, while imports were similarly driven by electronics-related products. HSI +1.35% to 27126.95, USDHKD + 0.05% to 0.0036, 10y HK Bond +1.5bp to 3.167%.