Global equities ended last week little changed in both local currency and sterling terms for the second week running. But once again, there was rather more going on below the surface than the headline calm might suggest. Most regions were broadly flat, aside from the Chinese market which returned from its New Year festivities in upbeat mood and managed a 4.7% gain.
Meanwhile, bond yields dropped back a little further. 10-year government bond yields are down 0.3% from their mid-January high in the US and 0.4% in the UK. The latter will be welcomed by Rachel Reeves as it reduces borrowing costs and will give her a bit more leeway to remain within the fiscal rules which had been looking under threat.
Gold hit a new high last week and is now testing $2900/oz in a sign that markets are rather more nervous than suggested by the calm above. It rose 2% over the week and is now up 9% year-to-date, beating for once its precocious upstart brother – Bitcoin has recently lost some of its mojo and is up only 4% this year.
Tariffs have unsurprisingly remained centre stage. That said, while the steady stream of announcements has caused a bit of volatility, markets seem to be learning not to overreact to the constant stream of news-bites given they often have a very short shelf-life.
Anyway, for what it’s worth, the current state of play is that the 25% tariffs imposed by Trump on Canada and Mexico have been delayed until early March in response to token concessions from both countries. As for the 10% additional tariff on Chinese imports, this has been implemented but only provoked limited retaliation from China.
Further tariff hikes are imminent. A 25% tariff will be imposed on US steel and aluminium imports from today. There was a similar move back in 2018 but exemptions were later given to the key countries in question. ‘Reciprocal’ tariffs are also to be introduced mid-week although the details are yet to be released.
In short, it is still far from clear how all this will play out. The view of most economists remains that tariff hikes will mean inflation is a bit higher and growth a bit lower than otherwise. But the risk of an all-out trade war derailing the global economic recovery remains quite small. In this respect, China’s muted reaction to last week’s tariff increase and Trump’s willingness to delay the tariffs on Canada for Mexico for quite small concessions are reassuring up to a point.
The equity market’s calm is in part down to the continued strength of the US economy which was confirmed by the data on Friday. Although US payroll growth was a bit lower than expected in January, the broader picture was that the labour market remains resilient.
Of more immediate consequence for equities, corporate earnings in the US are on course to post in the fourth quarter their largest gain in close to three years. With around 60% of the S&P 500 now reported, the expectation is for their earnings to be up a strong 15% on a year earlier.
The Magnificent Seven have all now reported other than their erstwhile cheerleader Nvidia which doesn’t report until 27 February. Their results have been a mixed bag and Alphabet and Amazon both disappointed last week. The Mag. Seven ended the week down 2% despite Nvidia recovering some of its heavy loss the previous week. Along with the arrival of the Chinese AI app Deepseek, the latest results have reinforced doubts that the Magnificent Seven may not be quite as exceptional as their valuations would make out.
Back here in the UK, the main focus was the Bank of England meeting. The MPC cut rates by a further 0.25% to 4.5% as expected. However, the path forward was left looking rather less clear than before, in part because of the conflicting pressures posed by the revisions to the BOE’s forecasts.
UK inflation is now projected to rise to as high as 3.7% later this year, before retreating again, while the growth forecast for this year has been cut to 0.7% from 1.5%. The confusion was increased by news that two members of the nine-strong committee voted for a 0.5% reduction whereas the official guidance is that a ‘gradual and careful’ approach to policy easing is appropriate. Most likely, rates will continue to be cut by 0.25% a quarter over the remainder of the year, taking rates down to 3.75% by year-end.
This coming week, tariffs will once again be centre stage, along with US inflation data on Wednesday. For UK investors and indeed the Chancellor, the fourth quarter UK growth numbers will be a key focus, with GDP anticipated to have shrunk a slight 0.1% over the quarter.
Rupert Thompson – Chief Economist