Global equities retreated 1.8% last week in local currency terms, erasing half of the gains seen on the back of Trump’s victory. The performance felt by UK investors, however, has been a bit different as a result of the post-election strengthening in the dollar. This has led to the pound weakening around 2.5% to $1.27 and meant global equities in sterling terms were little changed last week and remain up a firm 3.7% since election day.
Last week’s retreat can arguably be put down to investors having second thoughts about quite how good a Trump presidency will prove for equities. These misgivings may have been prompted by a couple of factors. First, it was confirmed that the Republicans had retained control of the House of Representatives, giving them a clean sweep of the Presidency and Congress and rather more ability for Trump to carry out his agenda.
Second, Trump has started appointing his top team and several of his proposed key appointees appear – how shall we phrase this delicately – less qualified than they might be or possessing somewhat unconventional views or a combination of the two. Loyalty to the leader instead appears to be the key pre-requisite for a seat at the top table.
There is also no sign yet that Trump is not serious in his threat both to impose a 60% tariff on China and an across-the board tariff of 10-20% on all countries. Unlike any tax changes which won’t take effect until 2026, tariff hikes could potentially be implemented fairly quickly after Trump’s inauguration in January.
A hike in tariffs is likely to depress growth and boost inflation and represents the biggest potential risk for markets. These latest doubts over whether US equities really merited a 5% Trump bump on the back of his plans for tax cuts and deregulation seem eminently justifiable.
While it can feel like Trump is the only game in town at the moment, one shouldn’t forget that Fed Chair Powell also remains a key player for markets. Indeed, one of the reasons why US Treasury yields have come under upward pressure recently is because of fears that Trump’s policies will be inflationary and reduce the extent to which the Fed will cut rates over the coming year.
Anyway, Powell did manage to grab the headlines for at least a few minutes last week with a speech in Dallas. Here, his message was that the current strength of the economy meant the Fed did not need to be in a hurry to lower rates. He also reiterated that the Fed will not react to potential policy changes under Trump until there is a lot more certainty about them.
Powell’s comments followed the release of the latest US inflation data which were broadly in line with expectations and showed the headline rate ticking up to 2.6% from 2.4% and the core rate unchanged at 3.3%. Even so, core inflation pressures have picked up a bit in the last few months, reinforcing our view, particularly with the probable tariff increases, that inflation will prove harder to return to 2% than the Fed expects.
The market still believes US rates are more likely than not to be cut again in December and that they will be back slightly below 4% by the end of next year. All the same, Treasury yields rose last week and even though we continue to believe yields look reasonably attractive, capital values look set to remain quite volatile due to the uncertainties over both Trump and Fed policy.
Here in the UK, the latest GDP numbers were a tad disappointing and confirmed the slowdown in the autumn following the stronger than expected recovery in the first half of the year. Output grew only a slight 0.1% in the third quarter, down from a 0.5% gain in the second, and fell slightly in September.
Given the doom and gloom prevailing ahead of the Budget, this slowdown is not a big surprise and growth looks set to pick up speed over the coming year on the back of last month’s increases in public spending. The Chancellor in her Mansion House speech last week also took steps to re-convince business that Labour is committed to its growth agenda following the negative reaction to the hike in employer National insurance contributions. Reeves announced a consolidation of local authority pension schemes and demanded regulators ease risk controls in the financial sector, both measures a bid to boost growth.
This coming week is quite light on economic data except for the UK inflation numbers on Wednesday and the US, EU & UK business confidence figures on Friday. Instead, the highlight for equity markets will probably be Nvidia’s results on Thursday. Nvidia’s share price may be 5% off its recent high but its market cap of $3.5tn still leaves it just pipping Apple to claim the title of largest company in the world.
Rupert Thompson – Chief Economist