Greenland – From confrontation to coordination
Greenland returned to the spotlight last week. President Trump’s rhetoric was again aggressive, particularly during his speech at the World Economic Forum in Davos. However, sentiment shifted last Wednesday when Trump announced that an agreement had been reached with NATO on Arctic cooperation, indicating that previously threatened tariffs on European countries would not proceed. At a time when NATO cohesion has increasingly been called into question, this pivot marks a meaningful de-escalation. The renewed focus on cooperation in the Arctic helps stabilise transatlantic relations, reduces tail risks around trade retaliation, and suggests a more pragmatic US stance towards Europe on strategic and security issues.
Japan – A tale of duration, fiscal and elections
Last week, the JGB market proved to be a key catalyst for the global duration sell-off. Following a marginally weak 20-year auction, the long end of the JGB curve sold off aggressively. The Takaichi trade remains firmly in place, supported by the announcement of snap elections scheduled for 8th February, alongside rising expectations of consumption tax cuts and renewed fiscal stimulus. With Japanese banks and insurers acting as net sellers of duration, any shift in behaviour could trigger a sharp reversal. On Friday, the Bank of Japan left policy rates unchanged but delivered a marginally hawkish signal. The 1y1y forward rate swap moved about 4 basis points higher approaching 1.5%, while JPY initially gapped stronger before sharply reversing lower later in the session, in what markets speculated to be FX intervention.
Federal Reserve – No rush to cut
This week, the Federal Reserve is widely expected to keep rates on hold. With inflation pressures currently contained and consumption and growth remaining resilient, the Fed has little incentive to adjust policy and can afford to wait for clearer signals. Markets are cautiously pricing the first rate cut no earlier than June. The premium associated with the new Fed Chair remains significant in the back half of the semester, reflecting uncertainty around reaction functions and internal consensus of the FOMC. Unless labour market data softens meaningfully, it is difficult to see a sufficiently unified FOMC moving forward with near term rate cuts.
Algebris Investments’ Global Credit Team
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