Premium"The Debate Here In Davos, And Everywhere, Is 'Sell Everything America' Or 'Buy The Dip'"
As Goldman MD in macro sales, Nimita Bhargava, writes late on Tuesday from Davos, "the debate brewing here, at Davos and pretty much everywhere I look" is "Sell everything America or Buy the dip."
Below we excerpt from Bhargava's note (available to pro subs).
Why it isn’t obvious… I won’t rehash all the headlines that have gotten us here but over the past 24hrs the risk off sentiment has clearly exacerbated on the 1/ movement in rates (lead by JGB sell off) 2/ Trump’s tariff and continued threats in Europe 3/ positioning is very long risk so some sort of natural profit taking.
#1 being the most important. The market is de-risking because Japan is no longer anchoring global duration and the spillover to US ylds (also led by fragile sentiment around US policy/institutions) is a real problem. Though having said that, many flag that this is a positioning-driven shock amplified by rising global yields, not a structural macro break. Tariff GDP damage is real but small, inflation effects muted, and policy bias still easier, not tighter. Recent memories of the ‘deepseek moment’, ‘liberation day’ and even the draw down of carry trades and the ~20% sell off in NKY back in 2024 were all ultimately bought quickly and the market resumed its march higher. Can or should this time be much different?
Where I land: keep your longs, hedge your book.
- Buy a dual digi: 20Mar26 expiry .SPX<97% & GLDUSD>103% @ 7.75% offer
- Buy a dual digi: 20Mar26 .NDX<96% & AUDUSD>101% @ 6.9% offer
In Europe…Trump proposed 10% tariffs from Feb 1 on imports from 8 European countries (DE, FR, UK, NL, DK, NO, SE, FI) with a threat to escalate to 25% on June 1 if they can’t reach an agreement over his desired purchase of Greenland (implementation remains highly uncertain). Goldman research estimates that President Trump’s announcement to impose a 10% tariff on imports from eight European countries from February 1 — if implemented — would lower real GDP in the affected European countries of 0.1-0.2% via lower net exports.
EU leaders have responded firmly to President Trump’s announcement to impose further tariffs on European countries, scheduling an emergency leaders’ summit for Thursday (January 22) to discuss potential retaliatory measures.
- The first option—with a low hurdle—would be to pause the implementation of the EU-US trade deal, which would imply that the EU does not eliminate tariffs on US industrial goods and selected agricultural products.
- The second option would be to impose counter-tariffs on goods imports from the US. During the EU-US trade dispute last year, the EU identified EUR 93bn worth of EU goods imports from the US that could be targeted by EU tariffs.
- The third response would be to launch the Anti-Coercion Instrument (ACI), which would allow for a broader range of retaliation options (including tariffs and restrictions on EU services imports from the US). Activation of the ACI would require a qualified majority in the EU Council and task the Commission with developing specific retaliation measures.
The uniform response of EU leaders suggests that retaliation is more likely than last year if Trump decides to move forward with new tariffs. At the same time, we would expect the EU’s retaliation approach to proceed gradually to leave room for de-escalation. We therefore expect the EU to start by pausing the implementation of the EU-US trade deal and readying counter-tariffs to be implemented shortly after any US tariff increases. In addition, we expect the EU to activate the ACI if the US escalates tensions further, but without implementing any measures immediately to leave additional time for negotiation.
On EURUSD… our trading desk (KBS) started to get bullish on EUR earlier this week and its certainly playing out. His thinking (worth reading entirely): From the outset it’s worth acknowledging that the opportunity set is not (at this stage at least) as clear and compelling as it was in the middle of H1 2025 - positioning is not as extreme wrong-way, the starting point is higher (+10%), and the market is also desensitized to the Truths that litter our newsfeeds. However, the market is on net probably the most short EUR it has been in ~10 months – participants have rotated into EUR funded EM carry positions (selling EURUSD to do so), and there has been a non-negligible participation into the Dollar-recovery trade from a highly malleable client base at the start of 2026. With no clear lean from FX forecasters and vols trending lower still our client base has been happy to side with momentum.
He wrote in the middle of last week that the significant EURUSD seller was still present – you can take this in one of two ways: Either, 1) respect the intense selling, and go with it – dangerous given you have no idea on when the music will stop. Or, 2) that we have found offsetting interest that is a match for this persistent supply, making momentum trading more dangerous and increasing the probability of a snap higher if the sellers finally let up. Paired with learnings of the last 48hrs of price action – EURUSD bid all Friday bar the Hassett reprice late London, persistent pre and post open Sunday night bids in the high 1.1570’s holding strong despite calls for a sharp reprice lower in thin Asia liquidity - we are inclined to start siding with 2).
We appreciate the markets hesitancy to sell anything US with the possible growth trajectory that it looks to begin 2026 on, but we would consider decoupling the Dollar from any such US performance trade. Growth contagion risks into the rest of G10 works both ways – the drag higher from the US could blunt the read-through into the Dollar appreciation that some expect. Trump has deliberately taken a long time to cement his Fed Chair pick – this stands in contrast to the quick decisions we have come to expect - it has to be assumed that any candidate will be amenable to short term rate cuts and perhaps now it’s just a judgement call of how many others in the board each pick can pull dovish. Mid-terms feel a long way off, but any attempt to actually follow through on Credit Card interest rate caps, home ownership constraints, delivery of the fiscal splurge $2k checks touched upon last year, or any other measures delivered under an Affordability Act could start to stack up on the Dollar-negative side of the equation if there are unintended consequences.
The European reaction to the 10% rising to 25% tariffs for supporting Greenland are unknown at this stage, but this is very different to the Q2 negotiations on trade. We will all become experts on the hoops and hurdles that need to be jumped through to invoke the Anti-Coercion Instrument or any other retaliatory measures, but we need to draw on lessons learned from last year. If the reaction from European RM last year was to partially hedge US assets (conveniently led by Danish RM last year), and if the flows over the last few weeks and months have been skewed towards reducing those hedges at the margin (selling EURUSD and taking profit), then one has to assume at a minimum that this puts any further unwind of hedges on hold.
Were this to escalate further one could argue that hedging of US assets is simply not enough and that actual divestment should be considered. Any actual divestment would be assumed to occur over a much longer time horizon, and the decision would be multifaceted. It’d likely require end-investor and board-level sign-offs like those we dreamt of but were never granted last year, but fears over “falling behind” by under-owning US assets are perhaps less a concern when you consider 2025 equity performances. The Nikkei, DAX, FTSE all performed better than the S&P and Nasdaq in local currency – in Dollar terms, even the CAC outperformed!
We are trying to stay objective and not let emotions impact our trading decisions, but with what the information set available to us now and with EURUSD trading in the low 1.16s, we’d rather be long EURUSD than short.
On Japan… "Why JGBs Sold Off? "Is Sanae Takaichi fit to be prime minister? I wanted to ask the sovereign people to decide". This news conference statement by PM Takaichi exemplifies how she is positioning this election as the people's vote for both her and her fiscal campaigns. While her party, the LDP, continues to drag in popularity, Takaichi seeks to win a simple majority that will allow her to push through her policies more easily. The bond market positions this election as a fiscal expansion story. Takaichi's proposal for food tax cuts came with no concrete source of funding and only added to fiscal deterioration concerns.
This is the headline.
Now, while today's moves could be largely attributed to this, we observe the biggest drivers may be market demand-supply dynamics. In summary, JGB markets are fragile with very skewed demand/supply dynamics. This not a new phenomenon. Rather a multi-year market trend that is difficult to reverse and only exacerbated on headlines like today. For a breakdown of the latest moves in Japan's bond markets, see here. According to Manoj Rangwani, JGB markets saw "Complete stop out from various players: regional banks are selling 15-20y with the combo of selling Nikkei to offset their losses on the bond side. Lifers are also managing their duration gap as the cheapening into the 20yr auction led to the duration gap being even more negative. With the street taking down more than 50% of 15yrs the 5-15yr tap on Friday, the street was already full with paper going into the 20yr. With the 20yr coming out cheap but within means, we thought the auction went well initially but the JIJI article during the day suggesting BOJ can bring rate hikes earlier and the government will look to cut consumption tax led to market puking further. Global RM who have been buying dips in the back end of the curve decided to stop out of flatteners, while city banks continue to put on steepeners especially in 2s10s causing the curve to steepen."
JPY Rates market desk commentary to start the day (Kota Hotta): The melt down in Japan rates in 2026 and the market has gone through extremely painful price action in 2026. 10y JGB is now at 2.37% (+7bps on the day) with 10s30s curve widening 19.5bps on a single day. There has been two main drivers of the move 1/the fiscal concerns, Prime Minister Takaichi has announced to temporary cut a consumption tax on food as the agenda for up coming election without addressing the proper financing plan, 2/the natural flows balance, where most of the flows on the franchise from the domestic community has been skewed on the selling side. There has been a massive hedging operations from domestic banks and lifers and the only buying has been seen from trust banks as the part of re-balancing and the international community to cover their shorts into the sell off. The fundamental dynamics has been reflected on the JSDA monthly data for December announced yesterday, where 1/lifers sold net ~820bn JPY, 2/trust bank and foreigners bought ~660bn and ~1.2 trillion respectively. LDN time flows was fairly inline with the data and our franchise confirmed more dip buying activities rather than the loss cutting activities despite the massive move in Tokyo time. There has been many questions from the investors about the potential BOJ intervention to bond market but we believe that the hurdle is extremely high for BOJ or MoF to stop the market in the current situation, that said, we still want to keep our eyes on the potential announcement from BOJ at 10:10 today. We believe any intervention from BOJ would be done on 5-10y sector and the operation to be done on OTM level if any. The sentiment remains extremely bearish in Japan rates and our trading desk believes that the volatility is going to remain high into the snap election as the expected outcome for election is not as clear this time vs previous few times. Today, there is 1-3y / 3-5y / 5-10y / 25Y+ Rinban scheduled on the day
On JPY… [GIR] The Japanese Yen has been among the worst performing currencies YTD, reinforcing its attractiveness as a funder for many investors. While we have been arguing that risks look skewed towards further weakness over the nearer term, we think it looks like a more dubious funder over the longer-run given two-way risks around the fiscal and the macro. We also expect to see marginally more supportive portfolio flows, though they are unlikely to be a dominant driver of the Yen this year under our baseline. We continue to see room for tactical JPY underperformance on crosses if incoming data support our procyclical baseline or if the early Lower House election, likely on February 8, results in a wider majority for the ruling coalition. Prior periods of notable steepening in the 2s30s curve in response to rising fiscal risks have coincided with 3-4% of upside in USD/JPY, roughly consistent with the moves seen YTD. However, we prefer more defensive expressions (e.g., long EUR/JPY) given the downside risks we still see to the US labor market and US yields as well as the increasing risk of intervention. While chart below shows that JPY has not yet reached the same level of weakness prior to the last interventions and the underperformance has generally been consistent with higher fiscal risk premium (rather than fully unexplained), there is no reason to believe that direct operations cannot come sooner. Imminent operations have already looked to be under active debate, and verbal intervention escalated a bit further on Friday with FM Katayama saying they are "prepared to take decisive action, including all available options." A "rate check" could come next, which has historically preceded actual intervention (see this FX Trader for more), though the last reported rate check came in the middle of the July 2024 operations that occurred over two days. The rate check prior to that, on September 14, 2022, came about a week before intervention. That said, our economists have also flagged the risk that the BoJ decides to hike rates sooner than expected if JPY depreciation persists. That should be the most successful approach to halting further JPY depreciation—particularly if the Board messages more of a front-footed response than “one and done.” Overall, we think USD/JPY over the near term looks likely to be in the range of 155-160, as the rising odds of intervention limit the upside, but incoming data and election risk look set to push towards further JPY weakness.
The real trade-weighted Yen remains at less stretched levels than prior to 2022 and 2024 intervention episodes
Korea has been getting a lot of attention: Despite better-than-expected exports in South Korea over the past year and the KOSPI rising by ~70% between April 2025 and year-end, the KRW has underperformed NJA FX peers since H2-2025. That underperformance of the Won, also captured in our GSBEER model residuals, has widened further this year with the Kospi up nearly 15% in the first two weeks of the year while the currency has depreciated. In response to this growing dislocation, there is growing commentary from key stakeholders. Earlier in the week, the Won moved sharply stronger following comments by US Treasury Secretary Bessent on KRW depreciation not being in line with fundamentals, although the move reversed thereafter. In its latest meeting, the BoK also kept rates on hold at 2.5% and turned less dovish, and the press conference was dominated by FX issues, with the governor explaining the host of FX stabilization measures announced late 2025. Much of the KRW weakness appears to be driven by heavy portfolio outflows by domestic investors, and therefore, a shift in these flows is key for the KRW to strengthen on a sustained basis. Our bullish KRW view for 2026 hinges on this shift materialising, and there are a few concrete measures to focus on. The National Pension Service (NPS) have likely re-started their FX hedging program, which by our estimates, could lead up to USD 50bn worth of USD FX forward sales. The authorities also announced a tax incentive program for investors to switch holdings from overseas to domestic assets. But it remains to be seen if these are enough of a focal point to shift domestic retail sentiment. [GIR]
Local Asian EM Rates… post DM duration move.. Jake summarizes this morning what is worth keeping on your radar:
- Korea sell off was again brutal .. Led by 5yr + .. Ostensibly on the fiscal exp headlines but its just a broad rejection of duration. Vols perked up .. And we had buyers of vol across the grid. Long vol guys I don't think have hedged for the past 20bp move + would expect the curve to weigh under the pressure of this flow today. 1y vs 1y1y >50bp bringing in all sorts of int to recv the 2yr pt.
- India .. More chatter of another FX swap weighing on NDS and basis as the OIS curve sold off. 3yr basis tighter by 7bp. We saw paying flow into this tightening.
- Hong Kong .. Corp flow in the 10yr pushing the xmkt 10bp from the lows in 5y5y. XCCY bid too from swapped MTr flow.
- Singapore .. Rates very heavy regardless of the global moves .. The dominance of SORA fixing + ALM receiving + demand for assets persists.
- Thailand ..Solid sell off again .. Steepeners across the curve - flow tilted this way from RM/HFs, and I don't think its agst bond-books.
More in the full note available to pro subs.
