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US-EU Trade War Reignites: Tariff Threats Rock Global Markets

U.S. President Donald Trump has recently threatened to impose a 10% tariff starting February 1 on goods exported to the United States from eight European countries—Denmark, Norway, Sweden, France, Germany, the United Kingdom, the Netherlands, and Finland—should they fail to reach an agreement on the purchase of Greenland. The tariff rate would be further raised to 25% on June 1, triggering sharp volatility across global financial markets. In response, U.S. equities sold off heavily on January 20, with the Dow Jones Industrial Average plunging 871 points in a single session, while the S&P 500 and Nasdaq Composite fell more than 2% and 2.39%, respectively, marking the largest one-day decline in recent months. European equity markets also opened broadly lower by over 1.5%, led by sharp losses in automotive, technology, and luxury goods stocks. Meanwhile, the VIX volatility index surged above 20, signaling a rapid escalation in risk aversion. The latest trade tensions stem from Washington’s attempt to strengthen its influence over Greenland, an autonomous territory of Denmark. After European countries firmly rejected the proposal, the U.S. resorted to tariffs as a pressure tactic, consistent with its long-standing protectionist trade stance. In response, the European Parliament announced on January 20 that it would freeze the approval process of the trade agreement reached with the U.S. in July last year, while also considering retaliatory tariffs on up to EUR 93 billion worth of U.S. goods, underscoring a hardened countermeasure posture. On the macro front, eurozone headline HICP inflation slowed to 1.9% year-over-year in December, marking the first reading below the European Central Bank’s 2% target since May last year. Core inflation also eased, although escalating trade frictions could push up import costs and undermine the recent disinflation trend. Looking ahead, EU leaders are expected to convene an emergency summit this week to assess whether to activate the “Anti-Coercion Instrument,” which could restrict U.S. companies’ access to the EU market. In the near term, financial market volatility is likely to remain elevated, with U.S. and European equities facing continued correction pressure, while capital may rotate toward gold and other safe-haven currencies. Over the medium term, should the tariffs be implemented as planned, the EU’s 2026 economic growth forecast could be revised down by 0.5 percentage points, while U.S. producer price inflation may rise from 2.8% to 3.0%, reigniting inflationary pressures. This would likely constrain the Federal Reserve’s rate-cut trajectory and accelerate the restructuring of global supply chains. Overall, although negotiations may eventually help de-escalate tensions and avert a full-scale trade war, geopolitical uncertainty is expected to continue to dominate investor sentiment ahead of the midterm elections.

IMF's Latest World Economic Outlook: 2026 Global Growth Raised to 3.3%

The International Monetary Fund (IMF) released its 《World Economic Outlook Update》 on January 19, 2026, revising the forecast for 2026 global economic growth upward to 3.3%, an increase of 0.2 percentage points compared to the October 2025 report. Specifically, advanced economies are projected to grow by 1.8%, while emerging market and developing economies are expected to reach 4.2%. Within this context, the economic growth rate for the United States was raised by 0.3 percentage points to 2.4%, and the forecast for mainland China was also lifted by 0.3 percentage points to 4.5%. Although global inflation is projected to fall to 3.8%, the pace at which the US returns to its target remains slower. Overall data reflects greater-than-expected economic resilience and a relatively stable inflation environment. This upward revision to the growth forecast is primarily attributed to the strong adaptability of businesses and the private sector to changes in trade policy, as well as infrastructure spending, such as data centers, driven by the artificial intelligence (AI) investment boom. Furthermore, the effective US tariff rate dropped to 18.5% (lower than the roughly 25% seen last April), thanks to supply chain diversification, the signing of trade agreements, and China's export shift toward non-US markets like Southeast Asia and Europe. Positive factors such as fiscal and monetary policy support and accommodative financial conditions collectively offset the headwinds resulting from trade uncertainty. Although short-term growth is stable, policymakers must remain vigilant regarding medium-term downside risks, including a potential AI investment bubble, escalating geopolitical tensions, and increased trade conflicts, all of which could disrupt supply chains and impact household wealth. The IMF recommends that policymakers rebuild fiscal buffers, maintain price and financial stability, and advance structural reforms to address uncertainty. Overall, the outlook is cautiously optimistic, but authorities must continuously monitor the realization of technological expectations and shifts in trade dynamics to ensure the medium-to-long-term growth trajectory remains on track.

Fed Latest Beige Book: Economy Grows Modestly, Inflation Pressures Rise

The U.S. Federal Reserve released its latest Beige Book on January 14, 2026, covering economic conditions across the 12 Federal Reserve Districts up to January 5. The report showed that economic activity exhibited slight to moderate growth in 8 of the 12 Districts, marking the first time in the last three cycles that growth turned positive in the majority of regions (in the previous three cycles, changes in most regions were slight). The labor market remained stable, with employment trends showing almost no change in 8 Districts; price levels rose at a moderate pace in most Districts, with only two reporting slight growth, and the year-over-year growth rate edged up from 2.9% in the third quarter of last year to 3.0%. Overall, the data reflects an improvement in the momentum of the U.S. economy, though it has not yet fully emerged from the shadow of weakness. The main factor influencing this data performance was cost pressures resulting from tariff policies. After businesses depleted their inventories, they began to pass some of these costs on to consumers, leading to a noticeable escalation of inflationary pressure, especially toward the end of 2025. Although manufacturing activity appeared slightly weak, consumer spending driven by the holiday season remained robust, and both service sector demand and banking conditions were better than in the previous report. Furthermore, while the labor market is stable, it still faces the risk of further weakening, and tariff-induced price increases may be masking actual inflation progress. Interviews with Fed contacts across the 12 Districts showed that businesses are becoming more optimistic about the future outlook, but the cautious approach to tariff cost pass-through remains the dominant factor in current economic dynamics. In the short term, the market anticipates that the Federal Reserve will maintain interest rates unchanged at the January 27-28 meeting. Goldman Sachs has lowered its probability forecast for a U.S. recession in 2026 to 20%, projecting that the federal funds rate might drop to 3%-3.25% by year-end. The medium-term outlook leans toward moderate growth, but requires close attention to the persistent impact of tariffs on supply chains and inflation; the Fed may view such temporary price volatility as something it can "look through." Overall, the Beige Book reinforces expectations of an economic soft landing, yet the actions of businesses passing on costs will test consumer endurance and the flexibility of the Fed's policies.

Latest US-Taiwan Tariff Negotiations: Rate Cut to 15% in Exchange for TSMC US Factory Expansion

Taiwan and the United States have achieved a major breakthrough in tariff negotiations. The U.S. will lower tariffs on Taiwanese exports from the original 20% to 15%, as of the latest update on January 13, 2026. This move grants Taiwan the same import treatment as Japan and South Korea, helping to reduce the cost of exports to the U.S., particularly benefiting the semiconductor and ICT sectors, which together account for nearly 90% of Taiwan’s trade surplus with the U.S. Following the announcement, the Taiwan stock market opened sharply higher on January 13, reaching an intraday high of 30,973 points, while TSMC’s stock surged to a record NT$1,720, with trading volume accounting for nearly 30% of the total market. The progress in negotiations is mainly driven by the U.S.’s trade reshaping strategy, using tariffs as leverage to secure increased investment from allies, thereby strengthening national security and supply chain resilience. The U.S. places high importance on advanced chip supply. Amid rising geopolitical risks, it has requested TSMC to expand capacity in Arizona, planning at least five new fabs with a total investment potentially exceeding US$165 billion. Taiwan, meanwhile, went through multiple rounds of talks, including the first phase from April to July 2025. The Executive Yuan’s Office for Trade Negotiations noted that both sides have reached consensus on tariff reductions and principles for supply chain cooperation, while also striving to avoid overlapping tariffs and ensuring benefits related to Section 232. In the short term, the agreement is expected to complete legal review and be officially announced by the end of January 2026, further boosting the Taiwan stock market and export confidence. In the medium term, it will help Taiwan’s semiconductor industry deepen cooperation with the U.S., though attention must be paid to rising investment costs for new fabs and potential production delays extending into the 2030s. For the U.S., the agreement is expected to drive substantial expansion of advanced semiconductor capacity, accelerate domestic chip manufacturing, strengthen supply chain security, and meet AI demand, creating tens of thousands of jobs and reducing reliance on overseas suppliers. Overall, the market outlook remains positive. Supported by continued AI demand, Taiwan’s economic growth could exceed the previously forecast 3.54%, although traditional industries still face low-cost competition from China, requiring the government to strengthen differentiated strategies. For the U.S., this can also serve as a showcase of trade policy achievements, reinforcing the Trump administration’s policy successes.

Fed Rate-Cut Compass: Cooling Inflation and Labor Market Challenges

The U.S. Federal Reserve’s benchmark interest rate is currently maintained at a range of 3.50% to 3.75%, down approximately 15.9 basis points year over year from 4.33%, marking a relatively low level in recent years. Inflation rose 2.7% year over year in December 2025, the lowest since July and below the market expectation of 3.1%. On the labor front, ADP private-sector employment increased by only 41,000 in December. Although this represented a rebound from a revised loss of 29,000 in the previous month, it remained well below the market forecast of 50,000. The unemployment rate held steady at 4.6%, a four-year high. The easing in inflation primarily reflects core inflation of around 2.3%, indicating that the Federal Reserve’s monetary policy has been effective in curbing price pressures, despite energy prices still rising 4.2% year over year. Labor market weakness stems from a pronounced slowdown in hiring and increased layoffs in the second half of 2025. According to ADP data, planned hiring declined 34% year over year, the lowest level since 2010. Fed Governor Milan noted that overly tight monetary policy has constrained economic growth and therefore advocated for a cumulative 150-basis-point rate cut in 2026 to support employment. In the short term, the probability of a rate cut at the Federal Reserve’s January 27–28 meeting stands at only 11.6%. While the median projection among Fed officials points to a single rate cut, investors are pricing in at least two cuts. Over the medium term, if labor data remain weak and inflation stays near 2%, total rate cuts in 2026 are expected to reach 100 to 150 basis points, potentially bringing the benchmark rate down to around 3.4%. Overall market sentiment remains optimistic, though risks include potential data distortions from a government shutdown and policy uncertainties associated with the Trump administration.