Please see below article received from EPIC Investment Partners this afternoon, which provides further input on the effects of Trump’s tariffs.
The Trump administration’s sweeping tariff regime is creating a perfect storm of economic challenges that could fundamentally reshape global finance. With weighted-average import duties soaring from 3% to approximately 25%, the US economy faces an imminent stagflation crisis—one the Federal Reserve appears ill-equipped to counter.
This economic predicament will likely manifest itself as US inflation is expected – by some commentators- to reach as high as ~5% within the year, driven by both direct import price increases and opportunistic pricing from domestic producers shielded from competition. Simultaneously, economic growth faces severe headwinds as businesses delay investments amidst trading uncertainty and consumers cut spending.
The economy’s structural capacity is further undermined by aggressive deportation policies and immigration restrictions shrinking the labour force, while productivity growth stalls. These factors could slash sustainable GDP growth from last year’s 2.5-3.0% to a projected anaemic 1.0%.
The Fed’s traditional toolkit may prove inadequate for this scenario. While Chair Powell has suggested patience on rate hikes if inflation proves temporary, this approach carries substantial risks. Inflation has already exceeded the 2% target for four consecutive years—a fifth year with accelerated price growth could permanently unanchor inflation expectations, potentially requiring drastic intervention reminiscent of Volcker’s 20% fed fund rates in the early-1980s.
Compounding these domestic challenges, global de-dollarisation could accelerate, particularly if the Fed withholds dollar liquidity during financial stress. While such a move would require an exceptionally high threshold, it could trigger serious global and domestic repercussions. A dollar shortage might initially strengthen the currency but could ultimately destabilise US markets. Though the Fed is independent, political pressure could steer decisions, with swap lines used as leverage. The irony is clear: isolationist policies and tariff threats may end up accelerating the very de-dollarisation they aim to prevent.
Despite these concerning developments, significant opportunities remain. Countries accelerating de-dollarisation efforts create openings in alternative currency markets, while companies adapting supply chains present investment prospects in emerging manufacturing hubs. Additionally, the volatile environment offers strategic entry points for value investors as market overreactions create mispriced assets across various sectors.
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Please see below article received from Brooks Macdonald this morning, which provides a global market update for your perusal.
What has happened
The closing levels in yesterday’s markets disguised some huge intraday swings, highlighting just how febrile the current market sentiment is. As an example of the extreme volatility yesterday, while the US S&P500 equity index closed the day ‘only’ down -0.2%, intraday the index recorded a massive 8.5% intraday swing in local currency price return terms. The catalyst for the huge swing in price action was attributed to a subsequently-proved ‘fake news’ social media post that US President Trump was mulling a 90-day delay to some of his reciprocal tariffs.
A huge intra-day swing in equity markets
A fake news headline that US President Trump was considering a 90-day delay to some of his reciprocal tariffs for countries excluding China sparked a huge rollercoaster move in markets yesterday. The headline appears to have originated from an interview that US National Economic Council Director Kevin Hassett gave on Fox News yesterday, during which he was asked if the US administration would consider a 90-day pause, to which Hassett responded that “I think that the president is going to decide what the president is going to decide.” As a measure of the move, the US S&P500 equity index in local currency price return terms went from a -4.7% drop shortly after the start of trading on Monday, to surge at one point to an intra-day gain of +3.4%, before subsequently unwinding those gains. In percentage terms, the 8.5% swing was the biggest intraday swing in over 5 years for the US S&P500 equity index, since March 2020.
Is Trump still in negotiation mode?
While investors are split on whether US President Trump’s tariffs are a permanent fixture going forwards or just a negotiating tactic, comments from Trump yesterday suggested it might yet still be more the latter potentially. Trump yesterday said that “we have many, many countries that are coming to negotiate deals with us, and there are going to be fair deals”, that “negotiations with other countries [excluding China], which have also requested meetings, will begin taking place immediately”, and later adding that “there can be permanent tariffs and there can also be negotiations because there are things that we need beyond tariffs”. Separately, US Treasury Secretary Scott Bessent yesterday said that “everything is on the table” when asked about the possibility of tariffs being lowered.
What does Brooks Macdonald think
When markets are this volatile, it pays to take a step back from the noise, to try to understand what we do know but perhaps more importantly what we don’t yet know. We know the scale of Trump’s tariffs and we know their planned implementation dates, as well as some retaliatory tariff plans from other countries. However, what we don’t yet know is whether these tariffs will actually end up sticking, and at what rates if at all – as we saw yesterday, even a glimmer of hope that Trump might only delay tariffs saw massive intraday moves in markets. Given Trump’s proclivity for changing his mind, and the range of tariff outcomes that are still “on the table”, it makes sense to stay calm and not to make any rash decisions that one might later regret.
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Please see below article received from EPIC Investment Partners this morning, which offers a different view on Trump’s tariff announcement.
The tariffs announced on Wednesday far exceeded expectations, including our own. While the scale of the tariffs is a concern, the bigger issue is the absence of a clear strategy to reverse course. The administration aims to reduce the US trade deficit by imposing tariffs based on the size of a country’s trade balance relative to total imports. That formula won’t change significantly unless there is a substantial shift in the relative competitiveness of the two nations.
Contrary to expectations that tariffs would support the US dollar, the currency weakened sharply against major peers. This reaction may hint at a broader policy direction. One key factor behind the persistent trade deficit is the dollar’s overvaluation, a result of loose fiscal policy combined with tight monetary conditions. Measures like the Big Mac Index highlight this imbalance, with the Japanese yen appearing undervalued by 46% against the dollar.
Last year, we noted the potential for a modern version of the 1985 Plaza Accord—a coordinated move to weaken the dollar. The dollar’s drop after the latest tariff news brings to mind President Nixon’s 1971 actions. Back then, Nixon imposed a 10% import tariff and ended the dollar’s convertibility to gold, effectively abandoning the Bretton Woods system. His goal was to weaken the dollar to reduce the trade deficit and boost US competitiveness. Though initially disruptive, the strategy eventually succeeded. Today’s policies may reflect a similar intent.
However, deliberately weakening the dollar brings risks, including higher inflation. That could complicate the Federal Reserve’s policy path, especially if growth slows at the same time. The result could be stagflation—low growth coupled with persistent inflation—making policymaking significantly more challenging.
For investors, the outlook is increasingly clear: bond yields are likely to fall. Tariffs raise uncertainty and pressure economic growth, increasing demand for safe-haven assets. Long-duration US Treasuries are particularly well-positioned to benefit from falling yields in such an environment. Historical precedent supports this—when growth slows and uncertainty rises, high-quality bonds tend to outperform.
Investors should also monitor for signs of coordinated international action to weaken the dollar. Although not widely discussed in the mainstream press, there is speculation about a possible Mar-a-Lago summit, where a coordinated devaluation of the dollar could be agreed. This would simultaneously improve US competitiveness and reduce the need for tariffs. Even hints of such moves could ease tensions and restore stability. Until then, markets are likely to experience subdued growth, falling bond yields, and rising volatility. Bond markets have been under pressure in recent years, but the current environment is very supportive of long-duration, high-quality fixed income.
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Please see below article received from Brooks Macdonald this morning, which provides a global market update. Please also refer to the additional comments at the end of the article for further context.
What has happened
The past 36 hours has seen a massive recalibration in markets following US President Trump’s ‘Liberation Day’ tariff announcement on Wednesday evening UK time. Coming into this week, there had been debate as to whether Trump would introduce either baseline or targeted tariff rates – in the end, he did both and based on a formula reflecting the size of relative US trade deficits with trading countries rather than trade barriers per se. Markets reacted swiftly with equity prices down sharply and bond prices up yesterday as safe-havens were sought out – US stocks saw the epicentre of the selling pressure yesterday, with the broader S&P500 (-4.84%), the technology-focused NASDAQ (-5.97%) and the small-cap Russell2000 (-6.59%) all suffering their worst days since 2020, all in US dollar price return terms.
A flawed tariff formula?
Trump has been consistently focused on the size of the US trade deficit, seeing it as the principal marker of perceived trade injustice against the US – that appears to have guided the formula unveiled this week that has calculated the tariffs the US administration is now set to roll out. As regards the targeted tariff rates, Trump’s team is not determining these on the actual tariffs that other countries presently levy against the US but instead using a calculation premised on the US trade deficit for a given country relative to what the US imports from that country. However, trade deficits do not always represent deliberate uneven competition, and instead can often reflect a natural imbalance arising from what goods a country makes and has particular expertise or advantage in.
An unwelcome tariff impact
Tariffs add unwelcome friction into global trade – akin to throwing sand into the gears of often complex cross border supply-chains around the world. Higher tariffs can increase the price of goods imported and sold, which can prove a headwind for end-consumers’ real disposable incomes, and in turn curbing economic growth. Complicating efforts to estimate these tariff impacts, it depends in large part on some still-as-yet unknown factors – for example, will those countries on the receiving end of Trump’s tariffs move to negotiate and compromise, in which case we may have already seen ‘peak tariffs’?, or will there follow a series of retaliation and reprisals from both those countries and the US in turn, risking higher-for-longer tariffs still to come?
What does Brooks Macdonald think
In any negotiation it is not unusual for one side to go all-in at the start with the biggest demands and then pull back somewhat in order to seek a common ground for agreement. For markets, that has to be the hope here, for were these tariffs to stick, then there are clearly adverse risks for both higher inflation pressures and lower economic growth. Complicating that, however, is whether those countries on the receiving end of Trump’s tariffs are able to compromise given that deficits are not always born out of deliberate unfair competitive practices – that could make these tariffs much harder to resolve. For all the events this week, the overarching question still remains whether Trump is seeking an ideological trade reset or a quickly-negotiated compromise – on that key question we are unfortunately no clearer as yet.
Comment
Markets have reacted badly to Trump’s tariffs. As ever, in this type of volatility, you need to remain invested, and if appropriate carry on with regular monthly funding too. For some, it also provides an opportunity to invest capital.
Markets don’t like uncertainty; we need a swift solution. Will Trump bring this to a close quickly? Or will we see drawn out negotiations – or a global tariff war?
The good news is that globally, some countries have been doing well. Japan, China were recovering, and Europe was starting to recover too.
If Trump does bring this tariff ‘negotiation’ to a close quickly, we could see a strong bounce back, or it could take a while for assets to recover.
In October 2024, JP Morgan in their annual report ‘Long Term Capital Market Assumptions’ stated that it would be volatile and that with this outlook, we need to be well diversified with active fund management. I agree.
Please see below article received from EPIC Investment Partners this morning, which provides an update on the US economy.
Last year, Jerome Powell emphasised the need for an “adult conversation” about US debt. Yesterday’s Congressional Budget Office (CBO) release highlights why this was so.
The CBO projects federal debt held by the public will hit 100% of GDP in fiscal 2025, escalating to 156% by 2055, surpassing historical peaks. Such debt levels threaten economic growth, increase interest payments to foreign debt holders, and risk fiscal instability, significantly limiting policymakers’ options.
Economic growth is expected to slow markedly in the coming decades. Real GDP growth is forecasted to decline from 2.3% in 2024 to 1.8% by 2026, averaging 1.6% annually through 2055. Factors such as an ageing population, declining birth rates, and reduced immigration drive this slowdown. Without immigration, the US population would shrink from 2033, directly impacting labour force growth, economic productivity, and tax revenues, ultimately affecting living standards.
The federal budget deficit remains substantial, with a projected $1.865 trillion shortfall in fiscal 2025, averaging 6.3% of GDP over the next 30 years. Persistent deficits, driven by rising interest payments and primary deficits, amplify the debt crisis, creating a challenging cycle to escape. Federal spending is projected to rise to 26.6% of GDP by 2055, fuelled by interest payments, healthcare costs, and increased Social Security obligations due to demographic pressures.
Federal revenues will temporarily increase due to the expiration of certain 2017 tax act provisions, then gradually rise to 19.3% of GDP by 2055. This growth primarily stems from rising real incomes and “real bracket creep,” as taxpayers increasingly move into higher tax brackets.
Policymakers face critical decisions, including entitlement reforms, tax adjustments, and strategic investments to enhance productivity. While the CBO projections assume existing laws remain unchanged, decisive actions could significantly alter this fiscal trajectory, resonating with Powell’s call for responsible governance.
The interaction between deficit reduction, economic growth, and interest rates is intricate. Meaningful deficit reduction could temporarily dampen demand, prompting the Federal Reserve to lower interest rates to stimulate growth. However, persistent high debt levels, typically hinder economic growth and reduce private investment.
Research indicates that economies with debt around 100% of GDP may require near-zero interest rates to achieve fiscal sustainability. Attaining this equilibrium involves a combination of fiscal consolidation, structural reforms, and monetary policy adjustments. Addressing the US debt challenge is crucial for long-term economic stability, avoiding future scenarios where debt severely limits economic potential and raises the spectre of possible default.
Nevertheless, economic pressures suggest a likely return to zero interest rates, creating a highly favourable environment for fixed income investments in the coming years.
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Please see below article received from Brooks Macdonald this morning, which provides a global market update for your perusal.
What has happened
Markets had a better day yesterday despite ongoing trade tariff worries, helped by a lower US consumer inflation print. The US S&P500 equity index rose +0.49%, the ‘Magnificent 7’ megacap tech group bounced +2.27% to their best day in 6 weeks, and the pan-European STOXX600 equity index gained +0.81%, all in local currency price-return terms. The VIX ‘fear’ index (a US S&P500 equity-options-derived volatility gauge) registered its biggest one-day drop so far this year.
Weakest US core inflation in almost 4 years
The latest US Consumer Price Index (CPI) monthly report for February landed yesterday, buoying risk assets. Both headline (all-items) and core (excluding energy and food) numbers surprised on the downside. The annual headline CPI rate of +2.8% (below +2.9% expected, and versus +3.0% in January) was the weakest since November, while the core CPI annual rate of +3.1% (below +3.2% expected, and versus +3.3% in January) was the weakest print in almost 4 years – since April 2021.
Bank of Canada cuts interest rates
The Bank of Canada (BoC) cut interest rates by 25 basis points yesterday, taking rates down to 2.75%. The move was in line with market expectations and brings the tally of cumulative cuts to 225bps in less than a year since the first BoC cut back in June 2024, when rates were at 5%. Referencing the latest US-Canada trade tariff uncertainty, the BoC said that “heightened trade tensions and tariffs imposed by the United States will likely slow the pace of economic activity and increase inflationary pressures in Canada”.
What does Brooks Macdonald think
There is a tug-of-war around the outlook for the US going on in markets currently. On the one hand, the latest economic data all suggest a US economy which is still far from stagflation: S&P’s US Manufacturing PMI (Purchasing Managers’ Index) survey saw the strongest reading in almost 3 years, since June 2022; the JOLTS’ (Job Openings and Labour Turnover Survey) US worker voluntary ‘job-quits’ were the highest since July 2024; and US annual core CPI inflation was the weakest in almost 4 years, since April 2021. Against this, US president Trump’s continued trade tariff headlines are clearly sapping investor confidence and causing sizeable market jitters – the risk is that the longer this goes on, the greater the likelihood that it could start to show up in economic activity data. For now, predictions of an imminent US recession are, thankfully, still wide of the mark.
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Please see below article received from Brooks Macdonald this morning, which provides a global market update.
What has happened
Yesterday saw more tariff headlines, and with it, more tariff-whiplash for markets. Investors have been struggling to keep pace with the policy-pivots from US president Trump, often in the space of hours, let alone days, and that tariff volatility and uncertainty continued through yesterday. In equity markets, the US S&P500 index finished up +1.12%, and the pan-European STOXX600 index gained +0.91%. The biggest gains (and headlines) however, were over in Germany where its plans to ramp up defence and infrastructure spending has lit a fire under the German stock market, with the country’s DAX30 index up +3.38% yesterday, all in local currency terms.
Tariff watch latest
Just a day after the US imposed 25% trade tariffs on Canada and Mexico on Tuesday, Trump announced yesterday that he has was suspending for one month those tariffs for auto makers – it looks like Trump blinked first, bowing to lobbying from the big US auto companies – Ford, GM, and Stellantis (which includes Chrysler). That said, the US Trump administration continued to stress the coming 2 April implementation date of ‘reciprocal’ trade tariffs with countries around the world that levy US trade currently.
Germany’s fiscal plans are a big deal
More details are shaping up around Germany’s hastily-drawn up plans for possibly as much as EUR 900 billion worth of fiscal spending, which will be split between two funds, one for defence, and one for infrastructure. The sudden zeal of German politicians is being driven by two factors: (1) the unprecedented US withdrawal from providing defence guarantees to Europe going forwards; and (2) the need for German politicians to ram this legislation through the old parliamentary term which has around two weeks left, as there is much less likelihood of securing the two-thirds vote needed to overturn the country’s fiscal debt-brake rule when the new parliament (with different party seat-numbers post the recent German Federal election) takes over later this month.
What does Brooks Macdonald think
Our Brooks Macdonald Asset Allocation Committee guides to a neutral outlook on Developed Europe ex-UK equities, with a broadly in-line-weight across our risk bands relative to our PIMFA benchmarks. While Germany has the debt-to-GDP ratio headroom to allow for this huge ramp in fiscal spending, the same cannot be said of the other major European countries. Supporting this neutral outlook, there are also still significant headwinds for the region, including US tariff risks, increased export-competition from China in autos in particular, and fragile regional economic growth risks more broadly.
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Please see below article received from EPIC Investment Partners, which provides an economic update on the US.
In the minutes from the January FOMC meeting, released yesterday, Fed officials expressed their confidence in maintaining steady interest rates amidst persistent inflation and economic policy uncertainty. “Many participants noted that the committee could maintain the policy rate at a restrictive level if the economy remained robust and inflation remained elevated.” The meeting minutes highlighted the cautious approach Fed policymakers have adopted following their decision to reduce interest rates by a percentage point in the latter months of 2024.
Several officials voiced concerns regarding risks posed by the prospect of another debt ceiling confrontation in Washington. “Participants cited the possible effects of potential changes to trade and immigration policy, the potential for geopolitical developments to disrupt supply chains, or stronger-than-expected household expenditure.” Counterbalancing concerns over tariffs and inflation, the minutes noted “substantial optimism about the economic outlook, stemming in part from an expectation of a loosening of government regulations or changes to tax policies.”
Meanwhile, the US consumer’s financial health is deteriorating at an alarming pace, according to both The New York Fed’s “Household Debt and Credit” report and industry data from BankRegData, with credit card defaults surging to levels not seen since the aftermath of the GFC. In just the first nine months of 2024, lenders were forced to write off a staggering $46bn in seriously delinquent credit card debt – a 50% jump from the previous year.
This troubling development is particularly acute among lower-income households, with Moody’s Analytics chief Mark Zandi noting that “the bottom third of US consumers are tapped out” with a savings rate of zero. The situation appears set to worsen, with $37bn in credit card debt already at least one month overdue.
This distress stems from a perfect storm of factors: aggressive lending during the post-pandemic spending boom pushed total credit card debt above $1tn, while persistent inflation and elevated interest rates have left consumers paying $170bn in annual card interest (yoy to September 2024). With the Fed indicating fewer rate cuts than previously expected for 2025, and Donald Trump’s proposed tariffs threatening to drive inflation even higher, the outlook for stretched US consumers appears increasingly grim.
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Please see below article received from EPIC Investment Partners this morning, which provides a global economic update.
Federal Reserve Chair Jerome Powell emphasised the central bank’s cautious stance on interest rate cuts during his recent congressional testimonies, a position bolstered by yesterday’s inflation data. The January Consumer Price Index (CPI) showed headline inflation rising 0.5%mom to 3.0%yoy, whilst core inflation, excluding volatile food and energy prices, increased 0.4%mom to 3.3% annually.
The data, which represented the largest monthly increase since August 2023, prompted a swift market reaction. US Treasury yields surged, whilst equity futures declined and the dollar strengthened. Notably, shelter costs accounted for nearly 30% of January’s increase, with both owners’ equivalent rent and primary residence rent rising 0.3%. The grocery sector also experienced significant price pressures, with egg prices alone contributing two-thirds of the food price increases.
However, beneath the headline figures, several encouraging trends emerged. Food prices, which had been a major concern for two years, have largely stabilised and are now running below the overall inflation rate, with the notable exception of egg prices. Core measures, including the Fed’s “supercore” (services excluding shelter), showed decreases, supporting the broader disinflation narrative. Even the January uptick in sticky price inflation appears to be largely seasonal, reflecting the typical clustering of price increases at the start of the year.
During his testimonies Powell maintained that the economy remains robust, characterising the labour market as “largely in balance.” However, he stressed that inflation, though easing, continues to run “somewhat elevated” above the Fed’s 2% target. “The economy is strong, and we have the luxury of being able to wait and let our restrictive policy work to get inflation coming down again,” Powell stated.
The Fed Chair also addressed various political challenges, carefully sidestepping questions about Trump’s proposed trade policies, including potential new tariffs on China, Mexico, and Canada. Powell emphasised that whilst it was not the Fed’s role to comment on tariffs directly, the central bank would respond through appropriate monetary policy adjustments if necessary. Throughout the proceedings, Powell repeatedly emphasised the Fed’s independence and commitment to data-driven decision-making, arguing that maintaining political neutrality leads to better policy outcomes and lower inflation.
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Please see below article received from Tatton Investment Management on Friday afternoon, which provides a review of markets over the past week.
AI upset challenges market dynamics
Erratic US politics versus measured central bank action failed to grab the headlines over AI, while positive UK markets should have got a mention.
What’s next for AI investment?
DeepSeek’s surprise challenge to the dominance of the US Mega Tech stocks upset the market this week, but competition should be good news for AI driven productivity.
Central banks diverge
The US Fed held interest rates and the European Central Banks cut them – what are the implications for markets as central bank divergence grows?
AI upset challenges market status quo
It has been another interesting week in markets, although for different reasons than recently. Most of the major regional stock indices have performed well, but global equities are down in aggregate. This is largely down to the underperformance of Nvidia, following the release of a low-cost, more micro-chip efficient AI model from Chinese start-up DeepSeek. It was also accompanied by mixed fourth quarter results from Apple, Meta, Microsoft and Tesla (Amazon and Alphabet report next week). While these “Magnificent 7” (Mag7) stocks performed poorly in aggregate, the overall global picture still looks decent – just with a different regional and sectoral makeup, for now. We consider that a good sign for markets going forward.
The tech sell-off could be good for markets overall.
DeepSeek’s release was labelled a “Sputnik moment” by Western media, and Donald Trump called it a wake-up call for US tech – whose leadership in AI was previously unchallenged. We discuss the impacts on tech and AI in a separate article, so will avoid too much detail here, but the important thing to bear in mind is that DeepSeek is probably a net good for the global economy. Technology becoming more cost and energy efficient (if we believe the story) is a natural part of progress – even if it is not great news for some of the big tech companies.
Investors seemed to agree with this sentiment: the Mag7’s sell-off did not spread across global markets, and many stock indices – like smaller US companies, Europe and the UK – gained through the week. This divergence is significant, because global equity prices have been so strongly driven by the Mag7 in recent times, both up and down. The concentration of capital on this small cabal has been an increasing concern in that time. This week’s moves have increased market breadth for now, which is a good sign.
Coincidentally, investor sentiment towards the Mag7 was dented by Tesla’s disappointing earnings results – which showed last quarter’s revenues down 8% from a year before. The electric carmaker’s stock shot up after November’s election, due to CEO Elon Musk’s role as Trump adviser, but was volatile this week. Tesla’s earnings miss might just be a blip, but one does have to wonder whether there is a tension between the profit interests of the electric car mogul and the “drill baby drill” president he has attached himself to. Interestingly, Tesla’s stock price moved less than one might have expected given the fact that analysts adjusted their outlook for earnings down by over 5% (according to Bloomberg’s data).
This meant that Tesla’s valuation actually rose, with the forward price-to-earnings multiple (for the next twelve months) rising from 120 to over 130. It was by far the most expensive of the Mag7 even before the election, when it traded around 80.
All this contributed to volatility in the Mag7, as some of the shine seemed to come off the world’s biggest stocks. Many would argue this was overdue.
Foreign investors feel good about Britain – even if Britons don’t.
It was non-US stocks’ time to shine this week and none shone brighter than the UK. Encouragingly, gains in the FTSE 100 (which is dominated by multinationals) were almost identical to the FTSE 250 (whose companies are more sensitive to the domestic economy), suggesting a broad improvement. This was helped by the continued fall in government bond yields, making equities more attractive by comparison. Thankfully, we seem to be over the gilt market anxiety seen a few weeks ago.
Now that bond markets have calmed down, Chancellor Rachel Reeves is continually talking up the government’s focus on pro-growth policies – such as in the discussion of a new Heathrow runway. The effects of this should not be underestimated. UK media has been consistently negative about the economy and the Labour government’s ability to manage it, but we think that the narrative was too pessimistic. No one denies that there are problems, but consistent growth-focussed policy (even if it is not the best policy) goes a long way to stabilising expectations.
Foreign investors have been generally averse to UK assets since before the Brexit referendum, which is partly why UK stocks have had consistently lower valuations than elsewhere. But lately, foreign investors are increasingly seeing Britain’s stocks and bonds as attractively priced – just perhaps in need of a jumpstart. We will have to await the follow-through, but Reeves’ growth talk might be helping, judging by this week’s rally.
UK policy clarity contrasts with US uncertainty.
The UK’s rally was similar to the uptick in European stocks, but the key difference is that the European Central Bank (ECB) cut interest rates this week, while the Bank of England (BoE) is expected to hold rates steady at its meeting next week. That means UK equity faces a slightly more challenging environment than on the continent. Nevertheless, the UK is probably also helped by ECB rate cuts, as European investors should have easier access to capital, with which they can buy competitively priced UK equities. More importantly, Britain’s economy should be helped by tentative signs of a rebound in European demand.
We discuss central bank meetings in separate article – where we note that uncertainty around Trump’s policies is forcing the Federal Reserve into a reactive, rather than proactive, role. Whatever one thinks about Trump’s politics, policy uncertainty makes it harder for people and businesses to plan ahead, which can weigh on economic sentiment.
The president seems to have adopted the “move fast and break things” mentality of his disruptor-in-chief Elon Musk. His administration certainly is moving fast – as shown by its attempt to ban all federal funding grants and then its rapid U-turn – but the problem is that it might end up breaking things. The funding ban was probably designed to be divisive (benefitting those aligned with Trump’s politics and punishing those opposed) but divisiveness does not build broad confidence.
After much anticipation – and excitement from US investors – we are now in a phase where Trump’s policies will start affecting the real economy, rather than just market sentiment. Disappointing business confidence numbers, released last week, suggest that might not be as positive as US investors believed in November. Those numbers are still open to revision, but we will have to watch the data closely from here.
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