Macro And Geopolitical Risks Resurface; Conservative Positioning Advised

Source: Kapitales Research

Overview:

US President Donald Trump has recently threatened to impose tariffs of up to 10% on several European countries starting in early February 2026, with the threat escalating if a deal to purchase Greenland is not reached. These tariffs, initially set at 10%, could increase to 25% by July if no agreement is made. This unexpected move has already shaken global markets, and the economic consequences are likely to reverberate across Europe, the US, and Australia.

Immediate Market Reaction:

• European Markets: The US tariff threat has triggered a sell-off in European equities, particularly in sectors with heavy exposure to the US, such as manufacturing, automotive, and technology. Investor concerns are growing that these tariffs could erode earnings growth for European companies, especially those exporting to the US. The European Commission has stated its readiness to retaliate, but specific details on how these measures will unfold are still unclear. The threat of such retaliatory actions, combined with political uncertainty, is contributing to the volatility in European markets.
• US Futures: US stock futures have fallen as markets brace for the potential economic fallout from the tariffs. While the tariffs could harm both US and European businesses, the biggest risk lies in the potential for a protracted trade war, which would likely strain corporate profitability. The market is awaiting further clarity, particularly in the wake of upcoming corporate earnings reports from major companies like Netflix and Johnson & Johnson.
• Australian Markets: The tariff threat has significant implications for Australia, which maintains strong trade ties with both the US and Europe. Australia's economic performance is intertwined with global trade, especially in sectors like mining, resources, and agriculture, which export heavily to these regions. The S&P/ASX 200 Index saw declines, with major banks and resource companies like BHP underperforming.

Impact on Australian Markets:

1. 1. Global Trade Concerns: Trump’s tariff threat increases global trade uncertainty, and Australia’s export-driven economy is particularly vulnerable. Australia’s major exports, such as iron ore, coal, and natural gas, depend heavily on smooth international trade relations. Any trade disruption caused by the US-EU trade tensions could hinder Australian exports, especially if European demand weakens due to tariff impositions. This could translate into slower growth for key Australian industries and lower overall market confidence.
   2. Risk to Mining and Resources Sector: The mining sector, including companies like BHP and Rio Tinto, could face increased operational risks due to reduced global demand if a broader trade war develops. This is especially true for Australian exports to Europe, which may be subject to slower economic growth in the event of a protracted US-EU trade conflict. Additionally, market sentiment is being impacted by fears of reduced earnings growth for Australian companies with exposure to European markets.
   3. Currency Volatility: The heightened geopolitical risk and trade tensions are also contributing to currency fluctuations. The Australian dollar could experience increased volatility as investors seek safe-haven assets like gold, particularly if European markets and the global economy suffer from escalating trade disputes. This could negatively affect Australian businesses that rely on the stability of the currency for international transactions and revenue.
   4. Precious Metals and Safe-Haven Assets: Amid growing risk, investors are flocking to precious metals, which are often seen as safe-haven assets during periods of market instability. Australian gold miners, such as Northern Star and Bellevue Gold, have seen positive stock performance as gold prices surged to record highs. This trend is likely to continue if the US-EU tensions escalate further, offering some protection for investors focused on the mining sector.

What To Do In This Situation

• Adopt a wait-and-watch approach: Allow volatility to settle before committing fresh capital.
• Focus on quality: Stick to businesses with resilient earnings profiles and pricing power.
• Review risk limits: Ensure stop-loss and exposure thresholds remain aligned with current volatility conditions.
• Stay informed: Markets are headline-sensitive; rapid sentiment shifts can alter near-term trends.

Source: TradingView, Analysis by Kapitales Research

Materials Sector Faces Profit Booking Amid Rising Costs in the Australian Market

The Australian materials sector is facing a wave of profit booking, contributing to its recent decline. After a period of strong performance, driven by high commodity prices and increased global demand, investors are reassessing their positions. The sector, particularly mining and resources, benefitted from the boom in commodities like iron ore and coal. However, rising production costs and ongoing global trade uncertainties have prompted caution.

Concerns about a potential global economic slowdown and the sustainability of elevated commodity prices have led investors to lock in profits and reduce exposure. Additionally, a potential slowdown in key markets, especially China, poses risks to demand. Given these factors, investors are urged to proceed with caution in the materials sector, carefully monitoring global economic conditions and commodity price trends before making investment decisions.

Conclusion:

The potential tariffs introduced by the US on European countries pose significant risks not only for Europe but also for global markets, including Australia. With its strong trade connections to both the US and Europe, Australia could see negative impacts across several key sectors, particularly mining and resources, and may face increased volatility in its currency markets. The uncertainty surrounding global trade and the potential for a prolonged tariff war has already caused turbulence in Australian equities, particularly for companies with exposure to European markets.

Investor Recommendation:

In light of the growing geopolitical risks, it is advisable for investors to focus on defensive sectors like utilities and consumer staples, while reducing exposure to industries vulnerable to trade disruptions. Investors with exposure to the mining sector may find opportunities in precious metals, but caution is warranted in broader market positions due to heightened risk. Additionally, closely monitor developments in US-EU trade relations, as the situation could evolve rapidly, influencing global and Australian markets alike.

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Disclosure: The information mentioned above has been sourced from the company reports and a third-party database, i.e. Koyfin. Investors are advised to use strict stop-loss to protect their investments in case of any unfavorable/uncertain market events.

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