LONDON, Jan 6 (Reuters) – European stocks and currencies rallied sharply on Monday after the Washington Post reported U.S. tariffs might be less aggressive than President-elect Donald Trump has previously threatened, injecting optimism into regional markets.
Trump’s aides are exploring tariff plans that would be applied to every country but only cover critical imports, the Washington Post reported on Monday.
The discussions centre on imposing tariffs only on certain sectors deemed critical to national or economic security, the report said, citing three people familiar with the matter.
The euro rallied as much as 1.2%, while European stocks got a lift, as auto shares in particular bounced. The STOXX 600 (.STOXX)
, opens new tab was up 0.8%, around session highs.
Other currencies that are highly exposed to possible U.S. tariffs also gained, with the Mexican peso and Canadian dollar up 1% and the Chinese yuan rising 0.4% in the offshore market.
“It is not quite clear what ‘critical imports’ refer to just yet,” Kyle Chapman, FX Markets Analyst at Ballinger Group, said in a note.
“However, it looks as if officials are already preparing to water down the worst of Trump’s campaign promises by narrowing the scope of the tariffs,” he said.
Meanwhile, reports on Monday suggested embattled Canadian Prime Minister Justin Trudeau might announce his resignation later in the day.
U.S. stock index futures , bounced 0.7-0.9% after the tariff headlines, suggesting an extension to Friday’s rally in the benchmark indices, although trading remains skittish.
“We start the new trading week, and new trading year, with stocks having enjoyed a strong Friday rally, where both the S&P 500 and Nasdaq 100 erased all of the declines seen a day prior. A choppy start, then, albeit in what were still thin trading conditions, with S&P volumes around 20% below the 20-day average,” Pepperstone senior research strategist Michael Brown said.
There is caution among investors ahead of Friday’s U.S. December employment report, where analysts expect a rise of 150,000 in the number of workers on nonfarm payrolls and for unemployment to hold at 4.2%
These will be preceded by data on ADP hiring, job openings and weekly jobless claims, along with surveys on manufacturing, services and consumer sentiment.
Anything upbeat would support the case for fewer rate cuts from the Federal Reserve, and markets have already scaled back expectations to just 40 basis points for 2025.
YIELDS CRAWL HIGHER
In fixed income, U.S. Treasury yields rose for a second day to 4.6%, a whisker away from last week’s eight-month high at 4.64%. Yields rose almost 80 basis points in the fourth quarter, with over 30 bps in December alone.
Investor appetite will be tested this week by the sale of $119 billion in new three-, 10- and 3-year Treasuries.
“(The) key level to watch in U.S. 10-year notes remains the May 2024 high at 4.64%, a break above which may signal an extension towards 4.75%,” analysts at Saxo Bank said.
High yields have given the dollar a natural source of support. The dollar index, which rose 0.9% last week, fell around 0.9% on Monday after the Washington Post report.
The Chinese yuan finished Monday’s domestic session at 7.3296 per dollar, its weakest since September 2023, prompting the country’s stock exchanges and central bank to defend its falling markets and soothe investor concern about the impact on the world’s second biggest economy of Trump’s imminent return to the White House.
Oil found support from colder weather in Europe and the United States, with a winter storm bringing snow, ice and freezing temperatures to a broad swath of the U.S. on Sunday, as well as from the drop in the dollar on Monday.
Brent was last up 0.4% at $76.86 a barrel.
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Additional reporting by Alun John in London and Wayne Cole in Sydney; Editing by Himani Sarkar, Gareth Jones and Ed Osmond
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