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Please find below the thoughts of the Evelyn Partners Investment Strategy team on today’s Bank of England MPC decision to cut interest rates by 25bps to 4.5%.. Received today – 06/02/2025

What happened?

As widely anticipated and long priced in, the Bank of England delivered the third quarterly 25 basis point cut of this easing cycle, taking the Bank Rate to 4.50%. 

The vote was split 7-2, versus the 8-1 shown by the Bloomberg survey. 

What does it mean?

Surprisingly, the voting split was significantly more dovish than expected with two members preferring to reduce the Bank Rate by 50bps to 4.25%, as opposed to the anticipated dissenter voting to hold.  Even more extraordinary was that one of those calling for the bigger cut was Catherine Mann, previously seen as the biggest hawk.

Weaker than expected GDP growth since the November Monetary Policy Report was noted, along with declining business and consumer confidence indicators.  This includes the unhelpful mix of weaker hiring intentions and higher price expectations (to 3.7% in 3Q25), driven by global energy costs and regulatory price changes.

As to the tone of the guidance there was little change with progress on the inflationary front being acknowledged ‘while maintaining Bank Rate in restrictive territory so as to continue to squeeze out persistent inflationary pressures’.  The bank retained full flexibility emphasising ‘the Committee will decide the appropriate degree of monetary policy restrictiveness at each meeting.’

Given the complicated mix of colour from the meeting, market reaction was muted. 

Bottom Line

The BoE lowered interest rates to 4.50%.  The UK swap market is pricing three further cuts through 2025.  Given the weakening growth outlook for the year, it will be interesting to see if committee members begin to look through inflation concerns resulting in the pace of quarterly rate cuts picking up.

Please continue to check our blog content for the latest advice and planning issues from leading investment management firms.

Marcus Blenkinsop

6^th February 2025

What happened?

As widely anticipated and long priced in, the Bank of England delivered the third quarterly 25 basis point cut of this easing cycle, taking the Bank Rate to 4.50%. 

The vote was split 7-2, versus the 8-1 shown by the Bloomberg survey. 

What does it mean?

Surprisingly, the voting split was significantly more dovish than expected with two members preferring to reduce the Bank Rate by 50bps to 4.25%, as opposed to the anticipated dissenter voting to hold.  Even more extraordinary was that one of those calling for the bigger cut was Catherine Mann, previously seen as the biggest hawk.

Weaker than expected GDP growth since the November Monetary Policy Report was noted, along with declining business and consumer confidence indicators.  This includes the unhelpful mix of weaker hiring intentions and higher price expectations (to 3.7% in 3Q25), driven by global energy costs and regulatory price changes.

As to the tone of the guidance there was little change with progress on the inflationary front being acknowledged ‘while maintaining Bank Rate in restrictive territory so as to continue to squeeze out persistent inflationary pressures’.  The bank retained full flexibility emphasising ‘the Committee will decide the appropriate degree of monetary policy restrictiveness at each meeting.’

Given the complicated mix of colour from the meeting, market reaction was muted. 

Bottom Line

The BoE lowered interest rates to 4.50%.  The UK swap market is pricing three further cuts through 2025.  Given the weakening growth outlook for the year, it will be interesting to see if committee members begin to look through inflation concerns resulting in the pace of quarterly rate cuts picking up.

Please continue to check our blog content for the latest advice and planning issues from leading investment management firms.

Marcus Blenkinsop

6^th February 2025

Please see this week’s Markets in a Minute update below from Brewin Dolphin, received yesterday afternoon – 04/02/2025

Trump and tariffs: What do they mean for key trade partners?

We look at how Trump’s major tariff changes could affect economic relations.

The return of tariffs

In his first term, it took Donald Trump a year to impose the tariffs he had threated during his campaign. Delays were compounded by the efforts of his own administration to thwart him.

This time around, it took him less than a fortnight.

Last weekend there was the announcement that 25% tariffs would be imposed on all U.S. imports from Canada and Mexico, with the exception of oil imports from Canada, which suffer a preferential rate of just 10%. The scale of these tariffs is much more severe than during the first Trump presidency when tariffs were limited to solar panels, washing machines, steel and aluminium.

Broadening the scope of countries affected obviously increases impact, but it also compounds it by reducing the workarounds where goods can be funnelled through different countries.

The announcement of these tariffs could have been seen as crystallising one of the major uncertainties which the market had been facing since it became likely that President Trump would return to the White House. But I avoided writing that it brings certainty. The tariff threat could very easily be dialled up or down. Trump was already warning that the European Union would be confronted, while hinting that the UK could possibly avoid it. Meanwhile, he’d already threatened Colombia with rising tariffs before dialling them back in less than an hour.

The tariffs against Canada and Mexico were delayed a month following calls with their respective leaders and apparent deals over enhancing border security. Companies had been working to get stock across the borders ahead of President Trump taking power. They’ll redouble those efforts now.

What happens when that month elapses? Here are a few potential scenarios:

• Canada and Mexico face a material risk of recession when, or if, these tariffs are imposed, while the U.S. may also suffer weaker growth.
• The average weighted tariff rate on U.S. imports will rise threefold on the levels seen in 2018.
• The impact on growth depends upon whether the money taken from U.S. consumers and businesses via tariffs finds its way back to them or just reduces the deficit.
• Inflation in the U.S. will rise, with some expecting it to reach 3%. Although the impact of tariffs should be a one-off adjustment which drops out of the Consumer Price Index (CPI) rate after a year, unless it impacts inflationary expectations. 

A big week for earnings

All of this came after a pretty hectic week of market movements. Last week was a big week for earnings, with Apple, Tesla, Meta and Microsoft from the ‘Magnificent Seven’ all reporting, but the volatility was driven by events taking place on the other side of the world.

In terms of those earnings, Apple’s were pretty good. Although its performance in China was weak due to increased competition, the company remains positive on broader emerging market sales. It also emphasised that iPhone sales have been stronger in regions that offer Apple Intelligence, the firm’s AI system, which has attracted some scepticism from the investment community.

Tesla’s results were behind estimates and vehicle sales guidance for 2025 was lowered. However, the shares shrugged this off due to strong performance in battery sales, plans for self-driving cars, and, particularly, a focus on Optimus humanoid robots, which the company is developing. 

The robot is expected to be used internally at Tesla for various tasks by the end of this year, with delivery to external companies pencilled in for the second half of 2026. Elon Musk’s companies tend to deliver amazing innovations, even if they don’t always meet their intended deadlines.

As for Microsoft, its results were a disappointment to the market. Growth in the Azure cloud services platform may be impressive at 31%, but some analysts expected it to be higher still. The theme of AI was again running through the discussion.

A new player in the AI space

These companies were reporting after last weekend’s revelation that Chinese hedge fund High-Flyer’s AI lab, DeepSeek, has created an AI model that performs on par with industry leaders.

What’s notable about this company is its ability to achieve impressive results with limited resources. While other companies have spent hundreds of millions of dollars on developing similar technologies, this firm has managed to do so at a cost of just a few million dollars. Its model also requires significantly less computing power to operate, making it a more efficient and cost-effective solution.

The efficiency comes from building a ‘mixture-of-experts’ approach. This means that instead of trying to produce one enormous model that can do the widest range of tasks, DeepSeek’s model is essentially a series of smaller specialist models that are optimised for different tasks. A gatekeeper breaks down a task into components and sends them to appropriate ‘experts’ – comparable to the division of labour into specialised roles.

One of the key factors contributing to the company’s success is its approach to innovation. By making its AI algorithms and models open source, the firm is allowing developers and researchers to access and build upon its technology. This route, which is also followed by Meta, enables models to build a community of users. Being able to see a model’s source doesn’t make it copyable because development is still expensive.

The release of DeepSeek saw a sharp drop in many technology-related shares. A lot of the value lost was claimed back in the following days.

The most obvious company to focus on would be Nvidia. Nvidia sells the latest cutting-edge chips required to build bigger and more powerful models. As DeepSeek was able to produce its model with older weaker chips, investors questioned Nvidia’s prospective demand.

Other companies like Google and Meta were also perceived to be at risk because the DeepSeek model would undercut processing costs in their own models.

In a market that’s ridden high on the hopes for AI, is the edifice about to come crashing down?

What does this mean for AI?

We’ve found the analogy between the AI boom and the gold rush to be an instructive one. In the 19^th century, the promise of gold encouraged people to migrate and work to try and uncover gold. Few succeeded, but fortunes were made selling them the equipment (picks and shovels) to do so. If we view the promise of AI to be the profits that can be generated by an AI model, then that business case has indeed been dented. However, if you see the promise of AI to be the gains made from the use of AI, then the falling cost is a good thing.

The principle of the Jevons paradox applies here. Let me explain…

The Watt steam engine burnt coal more efficiently, creating fears that coal demand would fall. Instead, steam travel increased. The same has been noted in countless technological developments ever since. Therefore, more competition in the AI world should accelerate the pace of adoption. The picks and shovels of AI are the semiconductors, the data centres and maybe even the power sources.

So, at the end of this tumultuous week for the technology market, the biggest questions surround the route to monetisation for the most cutting-edge AI models, while the route to greater adoption of AI has become a little smoother.

What’s ahead?

This week, there will be more earnings from ‘Magnificent Seven’ members Alphabet and Amazon.

Purchasing manager indices will suggest the state of different economies one month into the year. Provisional estimates revealed last week suggest the manufacturing sector may be recovering, although attempts to frontload purchases before U.S. tariffs are imposed may be distorting things.

On Thursday, the Bank of England is widely expected to cut interest rates from 4.75% to 4.5%, following in the footsteps of the European Central Bank, which cut rates last Thursday.

The week will then finish with the U.S. employment report, where 150,000 new jobs are expected to have been produced during January.

But these are just the scheduled and anticipated announcements. Recent weeks have been dominated by announcements from businesses and policymakers which had not been anticipated. With the tariffs issue now moving towards the top of the agenda for businesses and maybe consumers, the President’s language will be scrutinised for any hint of how this saga is going to develop.

Please continue to check our blog content for advice, planning issues and the latest investment market and economic updates from leading investment houses.

Charlotte Clarke

05/02/2025

Please see the below article from EPIC Investment Partners detailing their thoughts on active management in the ongoing trade war concerns surrounding the US. Received 04/02/2025.  

They say that if you see a £20 note lying on the floor in a financial market, it is probably gone before you can pick it up. But, in today’s world of shifting geopolitics and evolving investment trends, that £20 note might just be sitting there, waiting for someone who is paying attention. 

Recent research by Haddad, Huebner, and Loualiche sheds light on how passive investing has reshaped financial markets. Over the past two decades, the demand for individual stocks has become 11% more inelastic as passive strategies have grown. This indicates that prices are less responsive to changes in demand, creating inefficiencies that active managers can exploit. While active investors do adjust to fill some of the gaps left by passive flows, they only offset about two-thirds of the impact. In other words, opportunities are out there for those willing to look. 

This backdrop is particularly relevant as global trade relationships face growing strain. The potential decoupling between Western economies and China, or even broader shifts in trade alliances, could lead to significant reallocations in government debt holdings and equity markets. For example, if China were to reduce its exposure to U.S. Treasuries as part of a geopolitical strategy, the low elasticity in these markets suggests that active players might not immediately smooth out price distortions. Similarly, as companies localise supply chains to mitigate tariff risks, equity markets may witness mispricing in sectors undergoing structural shifts. 

In fixed-income markets, the growing proportion of passive ETFs tracking government or corporate bonds could amplify price distortions during periods of stress. Active managers can step in to provide liquidity and capitalise on these inefficiencies. On the equity side, stocks with lower index representation, such as small caps or niche industries, may offer outsized opportunities as passive flows overlook them.

The broader takeaway is clear: while passive strategies offer simplicity and low costs, they rely on active participants to maintain market efficiency. In an era marked by geopolitical uncertainty and structural economic shifts, active management continues to show its relevance. By identifying mispricing and adapting to changing conditions, active managers can deliver value that passive strategies simply cannot. 

So here is the punchline: if you are an active investor today, that £20 note is not gone, it is still right there for the taking. And in tomorrow’s market? It might just be a £50 note instead.

Please continue to check our blog content for advice, planning issues and the latest investment, market and economic updates from leading investment houses.

Alex Clare

05/02/2025

Please see below, an article from EPIC Investment Partners analysing the key factors currently affecting global investment markets. Received this morning – 04/02/2025

They say that if you see a £20 note lying on the floor in a financial market, it is probably gone before you can pick it up. But, in today’s world of shifting geopolitics and evolving investment trends, that £20 note might just be sitting there, waiting for someone who is paying attention.  

Recent research by Haddad, Huebner, and Loualiche sheds light on how passive investing has reshaped financial markets. Over the past two decades, the demand for individual stocks has become 11% more inelastic as passive strategies have grown. This indicates that prices are less responsive to changes in demand, creating inefficiencies that active managers can exploit. While active investors do adjust to fill some of the gaps left by passive flows, they only offset about two-thirds of the impact. In other words, opportunities are out there for those willing to look.  

This backdrop is particularly relevant as global trade relationships face growing strain. The potential decoupling between Western economies and China, or even broader shifts in trade alliances, could lead to significant reallocations in government debt holdings and equity markets. For example, if China were to reduce its exposure to U.S. Treasuries as part of a geopolitical strategy, the low elasticity in these markets suggests that active players might not immediately smooth out price distortions. Similarly, as companies localise supply chains to mitigate tariff risks, equity markets may witness mispricing in sectors undergoing structural shifts.  

In fixed-income markets, the growing proportion of passive ETFs tracking government or corporate bonds could amplify price distortions during periods of stress. Active managers can step in to provide liquidity and capitalise on these inefficiencies. On the equity side, stocks with lower index representation, such as small caps or niche industries, may offer outsized opportunities as passive flows overlook them. 

The broader takeaway is clear: while passive strategies offer simplicity and low costs, they rely on active participants to maintain market efficiency. In an era marked by geopolitical uncertainty and structural economic shifts, active management continues to show its relevance. By identifying mispricing and adapting to changing conditions, active managers can deliver value that passive strategies simply cannot.  

So here is the punchline: if you are an active investor today, that £20 note is not gone, it is still right there for the taking. And in tomorrow’s market? It might just be a £50 note instead.

Please continue to check our blog content for the latest advice and planning updates from leading investment management firms.

Alex Kitteringham

4^th February 2025

Please see below, an article from EPIC Investment Partners providing a brief analysis of the key factors currently affecting global investment markets. Received this morning – 31/01/2025

This weekend should bring clarity on whether proposed tariffs on Canada, Mexico, and China will be enforced, allowing for a better assessment of their impact on the US trade deficit. 

The US trade deficit has surged since the 1990s, evolving from a manageable issue to a persistent challenge. A monthly deficit of $8 billion in the mid-90s now exceeds $80 billion, sometimes surpassing $100 billion. Understanding its causes and evaluating policy responses is critical. 

China’s rise as a manufacturing hub has been a major driver. After joining the World Trade Organisation in 2001, China leveraged its low-cost labour force, accelerating US manufacturing offshoring. Imports from China soared, while US exports lagged, widening the trade gap. Oil imports have also played a role. Despite increased domestic production, the US remains a major crude oil importer. Fluctuations in global oil prices, driven by geopolitical tensions, further strain the trade balance. 

Beyond China and oil, trade imbalances with Mexico, Canada, and the European Union remain substantial. The automotive and electronics industries, heavily reliant on North American imports, illustrate how integrated supply chains complicate reshoring. Currency fluctuations and uneven economic growth further hinder deficit reduction. The decline in US manufacturing jobs has hit industrial regions hard, while growing reliance on foreign capital to finance deficits has driven up demand for the dollar. A stronger dollar makes US exports more expensive and imports cheaper, worsening the trade imbalance. 

Tariffs have been promoted as a solution, based on the idea that making imports more expensive will encourage domestic production. However, tariffs do not directly impact trade balance figures, as they are collected by the government. Rather than reducing the deficit, they add costs for businesses and consumers reliant on imports. Since the trade deficit is primarily driven by the gap between national savings and investment rather than the price of individual goods, tariffs often fail to yield meaningful improvements. 

Trump’s proposed 25% tariffs on Mexico and Canada have fuelled debate. While they may appear drastic, their actual economic impact will likely be limited. Many imports from these countries lack domestic alternatives. In industries like automotive manufacturing and electronics, reshoring is unrealistic. Instead, businesses will likely shift supply chains to lower-cost nations such as Vietnam, South Korea, or Taiwan, limiting tariffs’ effectiveness. 

If businesses switch imports to other countries rather than sourcing domestically, the additional cost to US consumers will stem from slightly higher prices of alternative suppliers, not the full 25% tariff. Companies may also cut costs and absorb part of the increase rather than passing it entirely onto consumers. The strong US dollar further mitigates inflationary pressure by keeping import prices low. While these tariffs may generate headlines, their actual impact on trade balances and consumer costs will likely be less than expected. 

The most effective ways to improve the trade deficit are reducing the budget deficit and weakening the dollar. A lower budget deficit would reduce reliance on foreign borrowing, easing capital inflows that push up the dollar’s value. Preventing excessive dollar appreciation would make US exports more competitive while making imports more expensive, narrowing the trade deficit. A weaker dollar would encourage domestic consumption and boost exports. Without addressing these fundamental issues, trade imbalances will persist, regardless of the level of tariffs imposed.

Please continue to check our blog content for the latest advice and planning issues from leading investment management firms.

Alex Kitteringham

31^st January 2025

Please see the below article from Brewin Dolphin detailing their thoughts on China’s new artificial intelligence (AI) lab and what this could mean for U.S. tech supremacy and their thoughts on the developments related to President Trumps’ trade tariff threats. Received this morning 29/01/2025.

Last week was always likely to be a lively one, beginning, as it did, with the inauguration of the most unorthodox U.S. president in living history, Donald Trump. In contrast to 2017, this version of a Trump presidency seems more organised and able to act faster and more decisively. Political events didn’t dramatically impact the market in either inauguration week, but the greater sense of calm may have been beneficial this time around.

When will Trump impose trade tariffs?

Most major markets performed well, but global investors will have experienced some movement in currencies. The U.S. dollar has lost ground, which probably reflects the fact that tariffs were not imposed on day one of the Trump presidency. U.S. tariffs on imports from Europe, for example, make European goods more expensive for U.S. consumers. As a result, those consumers buy fewer European goods, which means they need fewer euros. This is why, when a tariff is expected, the currency of the country imposing it tends to rise. The effect is to dilute the impact of the tariff, which is why there hasn’t been an improvement in the U.S. trade deficit since the return to the use of tariffs during President Trump’s first term.

Despite this, the threat of tariffs looms large over America’s trading partners. On his first day in office, President Trump claimed 25% tariffs would be imposed on Canada and Mexico by 1 February.

Perhaps acknowledging that tariffs won’t improve America’s trade balance, their use now seems to serve one of two purposes. In Trump’s first term, the threat of tariffs against Mexico and Canada achieved a renegotiation of the prevailing trade agreement. Tariffs against China were imposed and mostly remain, and the bilateral deficit between the U.S. and China has reduced since then. So, tariffs can be threats, temporary measures, or structural impediments to trade, and can be used to reduce reliance on a trading partner.

A Fox news interview with President Trump saw him declare that he didn’t want to impose tariffs on China, affording some relief to a region bracing for them.

Trump was gracious in his praise for China’s President Xi Jinping and North Korea’s Supreme Leader Kim Jong Un, occasionally displaying his fondness for autocrats, which can seem somewhat disturbing. However, he was critical of Russian President Vladimir Putin, whom he’s previously seemed deferential to.

Addressing business leaders at the World Economic Forum in Davos, Switzerland, he appealed to Saudi Arabia to lower oil prices to end the war in Ukraine. A cut in oil prices would be achieved by shipping more oil, which is inconsistent with President Trump’s desire to see America pump more oil, and his desire for Europe to buy oil from the U.S. We have to be wary of placing too much emphasis on Trump’s wish list, which typically includes several mutually exclusive items.

President Trump announces major AI investment

The performance of the U.S. equity market has been broadening out since the election. Although 2024 was a strong year for the ‘Magnificent Seven’ technology-enabled mega-cap stocks (Amazon, Meta, Alphabet, Tesla, Nvidia, Microsoft and Apple), last month saw the group lose ground against the broader market.

That trend was interrupted when the Trump administration announced a major investment in AI infrastructure called Starlink. The Japanese firm Softbank, with support from Abu Dhabi’s investment fund MGX, will fund investment in AI infrastructure led by U.S. firm OpenAI, which it’s claimed could reach as much as $500bn.

The U.S. government isn’t funding the project but is clearing regulatory hurdles. Perhaps this announcement was the biggest surprise of the new administration.

Is U.S. technological supremacy under threat?

Hot on the heels of the Starlink announcement came the news that an upshot Chinese AI lab called DeepSeek appears to have produced an AI model that can rival the Western leaders such as OpenAI and Meta’s Llama. The new model employs a ‘mixture of experts’ system, which involves splitting tasks into distinct groups of similar sub-tasks. Separate models are trained for each of those groups, which echoes the way human tasks were made more efficient through specialisation during the 20th century.

The DeepSeek model was put together with a fraction of the expenditure that went into the current best-performing models and caused ructions in a stock market that’s become very focused on how companies will monetise the benefits of AI.

DeepSeek’s approach implies that a similar quality of model can be achieved with a smaller or inferior set of chips – naturally, this would be very concerning for Nvidia, which is valued on the basis of high volumes of cutting-edge chips. The repercussions for the semiconductor value chain could be material.

A few notes of caution should be considered, though. DeepSeek hasn’t disclosed its training weights and some have questioned how confidently we can trust its development costs. It’s likely selling its product for lower margins than OpenAI. The DeepSeek model does fall short of OpenAI in some specialist processes.

Naturally, many global potential users would be nervous about using a Chinese model due to privacy or censorship concerns. But Western providers should be able to replicate DeepSeek’s open-source model. It might not matter too much for chip demand, though.

In the 19th century, William Stanley Jevons observed that greater efficiency in steam engines caused coal demand to rise rather than decline because it drives greater adoption. The modern world is full of examples of humans doing more of something on the back of technology making it more efficient, rather than taking the savings. Washing clothes, refrigerating (first food, then buildings) or lighting the Las Vegas Sphere are some examples.

So, having more efficient models seems likely to accelerate and expand adoption rather than reduce the demand for chips.

The U.S. has risen to its position of technological supremacy through being open and competitive. One school of thought suggests that massive state-facilitated investment in infrastructure plays to the observed AI scaling laws, whereby increasing parameters and computing capacity will derive better models. But Michael Porter, the authority on competitive advantage, notes that it stems from “pressure, challenge and adversity”.

DeepSeek claims to have achieved this breakthrough despite being limited by U.S. technology export restrictions, which raises questions about whether the United States’ industrial strategy is as foolproof as originally hoped.

How will President Trump impact immigration?

Immigration was a major policy priority, and the new administration took several steps to reduce immigration and prepare to deport unauthorised migrants. Much of this has been achieved by executive order, but legislation requiring the detention of undocumented immigrants suspected of crimes, even if they have not been charged, was passed by the Senate on Monday 20 January.

The legislation was able to pass so swiftly because it was supported by some Democrats. Ultimately, President Trump has discussed deporting millions of unauthorised migrants (estimates assume there are over 11 million in total). Doing so would be costly and logistically challenging. The greatest concern would be that a substantial reduction in workers risks causing inflation. The risk is particularly stark in sectors with high immigrant workforces, such as agriculture. Allowing immigration policy to drive a substantial increase in food prices due to a shortage of workers would be a substantial own goal, which is just one reason the administration is likely to fall short of its target to deport millions of unauthorised migrants.

How is the UK economy faring?

Away from the U.S., the UK’s public finance numbers were released, showing a higher-than-expected borrowing figure of £17.8 billion. However, this includes a one-off investment in military equipment. Excluding this, the borrowing figure would have been significantly lower.

The UK’s bond yields have been underperforming compared to other regions, and the market is pricing in a high probability of an interest rate cut in February.

Although the quality of the UK’s employment data has been poor, it seems there’s a clear trend emerging of slowing jobs growth, which may even have turned negative in the last two months (the data can be heavily revised, so it’s hard to say with certainty).

Retail is a sector that’s particularly under pressure. Retailers are large UK employers and so feel the brunt of the increase in employer’s National Insurance contributions, which was announced in last October’s Autumn Budget.

Sainsbury’s announced last week that it would cut 3,000 jobs and stagger a planned pay increase to reduce costs. Job losses wouldn’t just be on the shop floor; the supermarket plans to cut 20% of senior management positions. 

This week: Earnings season, interest rate decisions and confirmation hearings

This week will be an important one for the fourth quarter earnings season. So far, earnings season has gone well, largely supported by the banks, with decent results from companies like Fastenal, Amphenol and Schwab. The current percentage of beats to misses (the number of companies that have beaten or missed analysts’ earnings expectations) is running slightly ahead of its historical average. This week will include the first of the ‘Magnificent Seven’ (Apple, Microsoft, Meta and Tesla) and broaden out the sectors reporting.

On Wednesday, the U.S. will be setting interest rates. So far, all forecasts are for rates to remain on hold, despite the new president saying he would “demand that interest rates drop immediately”. Analysis of the options market reveals a small but growing expectation that the Federal Reserve’s next move could be to increase rates, rather than cut them. To be clear, the majority view is still that the next move will be a rate cut, but uncertainty surrounding the new administration’s policies has led to a cohort of bond traders betting on an interest rate increase.

President Trump may be happier with Thursday’s European Central Bank meeting, in which interest rates are almost certain to be cut. These meetings come after Japan raised interest rates by 0.25% to 0.5% Friday morning. This was widely expected, so focus was on the Bank of Japan forecasts, which saw a sharp upgrade to expected inflation – so the risks to Japanese interest rates seem skewed to the upside.

There will be more action on the political front too, with confirmation hearings for the new U.S. Secretary of Commerce, Howard Lutnick, and one of the most controversial selections, Robert F Kennedy Jr. as Secretary of Health and Human Services.

Please continue to check our blog content for advice, planning issues and the latest investment, market and economic updates from leading investment houses.

Alex Clare

29/01/2025

Please see the below article from Brewin Dolphin examining the potential impact on the global investment landscape of a Trump administration. Received yesterday 27/01/2025.

The President Trump reboot has well and truly arrived. We may be just a few days in, but the implications for the global economy and investors are already starting to take shape.

As we navigate this new landscape and a flurry of executive orders are signed, it’s first worth remembering what powers the president has and how he might like to wield them.

The power of the President

As President, Trump leads the executive branch of government, which is responsible for enforcing laws. Congress writes those laws, although in modern times, the President has a significant influence over their drafting. If Congress drafts a law without the President’s input, he can veto it.

This separation of powers checks the President’s power. However, Trump’s Republican Party controls Congress and in his first term he also gained significant influence over the third branch of government, the judiciary (courts), therefore reducing the check’s effectiveness.

The President also uses executive orders, instructions from the President to a federal agency to undertake a specific action. Unlike laws passed by Congress, executive orders can’t spend money or change taxes, but do offer Presidents significant power over non-budgetary matters.

These arrangements haven’t changed since President Trump’s first presidency. What has changed is his team…

Team Trump unites

There is a greater cohesion at the start of this Trump presidency. In 2017, members of his own team sought to water down or delay some of his initiatives. In 2025, the Trump administration seems to be pulling in the same direction.

But what is that direction?

Since the election, the three main categories the administration has been targeting have remained broadly the same.

Trump and taxes

Policy direction

Trump’s first term saw sweeping tax cuts across personal and corporate taxes, some of which are due to expire during 2026. Given he campaigned on a pledge to lower taxes for this election, his priority will be to ensure that those existing cuts are made permanent or extended. He may even try to cut taxes further, particularly for companies producing goods in the U.S.

The reality

As mentioned, these budgetary processes need to pass through Congress, which will probably feel compelled to rollover existing tax cuts. One major obstacle to further tax cuts is the U.S.’s substantial budget deficit, which stood at over $1.8 trillion for the 2024 financial year and took U.S. national debt to over $35 trillion. Given this challenge, achieving additional tax cuts appears to be a difficult goal.

The impact

If taxes can be cut, it could encourage consumers to spend more, which would bolster U.S. growth. Typically, this would lead to increased employment. However, with low unemployment there’s limited scope for this, so tax cuts might instead lead to inflation. Considering these factors, the most likely outcome seems to be a continuation of existing tax cuts, with only minor additional cuts. Whatever the decision, it will likely take weeks if not months of negotiation.

On his other goals, President Trump has been able to act faster…

Trump and immigration

Policy direction

Trump has been outspoken about the need to rein in immigration and has also discussed deporting millions of unauthorised migrants (estimates assume there are over 11 million in total).

The reality

Trump has already taken several steps to reduce the number of immigrants and prepare to deport unauthorised migrants. Much of this has been achieved through executive order, but legislation passed through Congress within days, requiring the detention of migrants suspected of crimes, even if they haven’t been charged. This legislation was passed swiftly because it was supported by some Democrats. Ultimately, President Trump’s efforts in this area are likely to continue.

The impact

There is undoubtedly a substantial human cost associated with deporting unauthorised migrants, one that should be deeply considered. It will also come at a significant monetary cost and pose considerable logistical challenges. However, the greatest economic concern is that a substantial reduction in workers could risk causing inflation, particularly in sectors with high immigrant workforces, such as agriculture.

Allowing immigration policy to drive a significant increase in food prices due to a shortage of workers would be a substantial own goal. This concern is just one reason why the administration is likely to fall short of its unauthorised migrant deportation targets.

Trump and tariffs

Policy direction

One of Trump’s key objectives is to win benefits for America by imposing taxes on imports (tariffs).

The reality

President Trump immediately ordered a series of investigations which are a precursor to imposing tariffs. On his first day in office, he claimed 25% tariffs would be imposed on Canada and Mexico by 1 February 2025.

Tariffs serve multiple purposes within Trump’s world. In his first term, tariffs on Chinese imports aimed to reduce imports from a strategic rival, with debatable success. Alternatively, Trump has used tariffs as bargaining chips to renegotiate trade agreements, as demonstrated against Mexico and Canada in his previous term. So, tariffs can be threats, temporary measures, or structural impediments to trade.

The impact

The direct economic impact of tariffs is to discourage trade. This means in the first instance, it’s likely to reduce economic activity for net exporters and increase it for net importers. This has been reflected in stronger U.S. economic growth expectations for the U.S. relative to other regions.

Tariffs will also increase prices. A price increase is inflationary, but only for imported goods. Typically, this effect is temporary as tariffs are a one-off increase in cost. Tariffs may be charged on imports, but those higher prices are paid for by consumers and, with inflation high on voters’ priority lists, excessive use of tariffs could be unpopular.

Generally, if one country imposes tariffs, the target of those measures will impose countervailing (retaliatory) tariffs. So far, countries have been cautious about responding to Trump’s threats, waiting for a clearer sense of what will be enacted and what is mere rhetoric. For the UK, it’s unlikely to be a major target of the Trump administration’s trade policies given its trade deficit with the U.S.

In a speech to the World Economic Forum last week, Trump also complained about European sales, or value added, taxes. These are often seen as barriers to trade, as imports are subject to the local sales tax, while exports aren’t. The interactions between VAT and trade are complex, and research has cast doubt on the intuitive belief that VAT enhances export competitiveness. However, Trump is an intuitive individual and may threaten tariffs until European sales taxes are dropped. This might seem like a welcome outcome for UK consumers, but like all taxes, if VAT was cut, something else would need to rise to replace lost revenue.

What about deregulation?

Underlying the President’s agenda is a broad thrust of deregulation, including environmental policy. This aims to ease investment in the U.S. and boost American economic capacity.

The President has ordered Federal waters to be made available for oil drilling, which could add to U.S. growth and help to moderate inflation. Meanwhile, Trump has once again ordered that the U.S. withdraws from the Paris Climate Agreement.

Perhaps the biggest surprise of the new Trump administration has been the announcement of a major investment in artificial intelligence (AI) infrastructure, led by U.S. firm OpenAI and backed by Japanese firm Softbank and Abu Dhabi’s AI investment fund. The U.S. government is not funding the project but is clearing regulatory hurdles for the deal, which is valued at up to $500bn. 

A new era of uncertainty?

In the weeks leading up to and following President Trump’s election victory, financial markets anticipated higher inflation, and the early days of his presidency have done little to dispel this expectation.

Trump’s economic policies aim to stimulate growth through deregulation and tax reform. However, this growth may come at the expense of other regions due to the implementation of tariffs.

The upshot is that U.S. stocks or companies exposed to the U.S. economy are likely to enjoy the thrust of the new government’s policies more than other regions (perhaps unsurprisingly). According to the International Monetary Fund (IMF), among advanced economies, the U.S. is stronger than previously projected on continued strength in domestic demand. The IMF raised its growth projection for the U.S. this year by 0.5%, to 2.7%, as a result.

However, overly vigorous immigration policy and tariff enforcement could potentially restrict economic growth or exacerbate inflationary pressures. In this context, the President’s repeated threats to influence interest rate policy have been unsettling to bond markets. For now, this has resulted in higher yields than those seen in the months preceding the election, making them attractive to investors. Nevertheless, just how fast and loose President Trump is willing to play with inflation will need to be monitored closely.

While most actions taken so far align with pre-election expectations, the early days of the administration have not resolved many of the uncertainties either.

Please continue to check our blog content for advice, planning issues and the latest investment, market and economic updates from leading investment houses.

Alex Clare

28/01/2025

Please see below, this week’s Monday Digest from Tatton Investment Management, analysing the key factors currently affecting global investment markets:

Is the Trump trade still on? 

Capital markets were a sea of green in Donald Trump’s first week back. US investors like his tax cut, deregulation agenda, but we have argued they might be underestimating the risks. Britons and Europeans might be biased though – as one survey revealed we are among the most pessimistic about what Trump means for our own futures. US investors think Trump’s threats are “the art of the deal” and the early interactions with US trading partners suggest they might be right. Even so, political volatility can frustrate policy – as in Elon Musk’s recent disagreements with some of Trump’s announcements. 

Not all the US optimism is about the Trump trade, though. US economic data is strong and the Federal Reserve has made some dovish signals. That has led to increased demand for government bonds, whose yields look attractive. The most in-demand have been UK gilts – whose yields have now sunk below the US, despite predictions of UK fiscal disaster. A record oversubscribed bond auction last week showed international investors are more than happy to lend to the treasury. 

The flipside of investors putting America first has been many putting Europe last. There was talk of “peak pessimism” on Europe at the World Economic Forum in Davos, but it’s notable that European stocks have been performing very well in total return terms this year. Business sentiment surveys suggest that Europe’s fortunes may be turning: European businesses are gaining confidence, while Americans are seemingly losing it. We should note that the US numbers are likely obscured by the Trump transition and should return to positivity, however.  

European leaders have also expressed a desire to work with Trump and expand their military spending – as he has long demanded. That would effectively mean fiscal expansion, the short-term growth benefits of which shouldn’t be underestimated. We have argued for a while that, despite the doom and gloom, there is a plausible recovery scenario for Europe. More people seem to now believe it.  

How valuable is a Trump meme? 

Cryptocurrency traders are big fans of Donald Trump – but the new president angered many in the industry when he launched he and his wife each announced their own memecoins on the eve of inauguration. $TRUMP soared then quickly sank, and many criticised it for undermining faith in digital currencies. A crypto-friendly executive order, signed this week, went some way to redeeming him in the industry’s eyes, but inflating memecoins does nothing to help cryptos in the long-term. 

Trump promises to be “the most pro-crypto president” ever, and Bitcoin prices hit a new all-time high after his inauguration. Crypto traders hope that a friendly White House will accelerate adoption and overcome the reputation of volatility and excess that has kept cryptos out of the mainstream. 

$TRUMP and $MELANIA don’t help that reputation. Memecoins are speculative by nature – with prices based purely on the popularity of the meme – and hence some in the industry accused the president of corruption, using his position to boost his wealth. The irony is that the “speculative bynature” critique is often levelled at cryptocurrencies broadly. We suspect some of the anger might be down to nerves at how stretched the crypto rally has become, and the frothy trading in lesser known tokens. 

Cryptocurrencies are slowly entering the investment mainstream, but we still don’t consider them appropriate for our portfolios, because they are fundamentally hard to value. The technology underlying them – most notably blockchain – does have value in its economic potential, however, as do companies that trade in such assets and technologies. Crypto-related assets might be appropriate for long-term investors, but for cryptos themselves to be appropriate, we need to see broad acceptance and commonly agreed valuation methods. Trump’s policies might eventually help that, but inflating your own memecoin bubble does the opposite.  

The changing commodity outlook 

Commodity prices have been on a decent run over the last month, but the price outlook is uncertain because of global growth uncertainty. In general, we expect a near-term cyclical boost followed by long-term oversupply – but this varies across different commodities. 

The oil market was oversupplied in 2024, but prices were supported by OPEC+ production cuts and geopolitical scares. Oil could rally from here, due to US sanctions on Russian shipping and the strength of US demand, but the longer-term outlook is less promising. President Trump plans to boost US production, and tariffs could weigh on demand.  

The natural gas outlook is similar: supplies are currently tight (mainly in Europe) but Goldman Sachs expect a long-term boost in liquified natural gas (LNG) supplies from the US and Qatar. Some expect this to be outweighed by demand increases owing to AI datacentres, but we don’t see much evidence of this yet.  

The exception is China, where energy demand has been strong and will likely continue thanks to government stimulus and efforts toward the green transition. This will benefit copper prices more than steel – which has traditionally rallied on Chinese stimulus.  

Goldman Sachs expect last year’s gold rally to continue, as central banks keep buying the precious metal to diversify away from the dollar and hedge against inflation and geopolitical risks. Trade risks from Trump tariffs will likely mean more gold buyers.  

Higher near-term commodity prices mean more inflation pressures. This might force the Federal Reserve to keep interest rates high, given US economic strength, but the European Central Bank is likely to ‘look through’ any spike and support its weak economy. The ECB will be particularly pleased if Goldman Sachs are right about the LNG supply glut. While that is a long-term consideration, it would remove the biggest headwind for European growth. The supply-demand balance could look very different in a few years. 

Please continue to check our blog content for the latest advice and planning issues from leading investment management firms.

Andrew Lloyd

27^th January 2025