Equity markets had a quietish week, in part down to the Thanksgiving holiday in the US. Global equities gained 0.7% in local currency terms but were down 0.4% in sterling terms due to a modest rebound in the pound to $1.27.
UK equities fared relatively well, reversing a bit of their recent underperformance and rising 0.4% with mid-cap stocks up 1.1%. A burst of M&A activity, most notably Aviva’s bid for Direct Line, highlighted the cheapness of UK small and mid-cap stocks and is one of the reasons why we continue to favour this area of the market.
Bonds had a good week with UK gilts and US Treasuries returning 1.1% and 1.4% respectively, on the back of a 0.15-0.20% fall in yields. 10-year Treasury yields are rather suprisingly now slightly below their level before the election despite the worries over the inflationary impact of Trump’s plans to hike tariffs and cut taxes.
The latest US inflation numbers provided no justification for the fall in yields. The Fed’s favoured measure of core inflation as expected edged up in October to 2.8% from 2.7%, reinforcing a picture of inflation levelling off around this level rather than heading back down to 2% as the Fed would like.
More comforting was the news that Trump was nominating Scott Bessent as Treasury Secretary. Bessent is seen as a rather safer pair of hands than some of the other contenders. But any relief was then tempered by Trump nominating a tariff hawk as US Trade Representative. Trump also proceeded to announce that day one of his Administration, he would impose a 25% tariff on Canadian and Mexican imports, unless they ended the flow of illegal immigrants and fentanyl, and an extra 10% tariff on Chinese imports.
How Trump’s tariff threats end up playing out is one of the big unknowns facing the markets. For starters, it is still very unclear to what extent his bark will prove worse than his bite. This was certainly the case the last time he was in power. Indeed in 2019, he never carried through with a threat to hike tariffs on Mexico by 25%. As for the rise in tariffs on China, the 10% hike is actually much smaller than the 60% increase he had been threatening….but this is early days.
Trump’s scatter gun approach means it is dangerous to say anything with too much conviction. But assuming he does not carry out his threat to place a 10% tariff on all imports (this will be harder for Trump to implement than imposing tariffs on particular countries) the UK may get off relatively lightly.
The UK appears to be well down Trump’s list of trade villains. Moreover, the majority of UK exports are services, rather than goods which would be the focus of any tariffs, leaving it less exposed to Trump’s wrath than many other countries. UK exports of goods to the US comprise a mere 2% of UK GDP.
France moved into the news last week as a result of the problems the minority coalition government has run into trying to pass its Budget. The opposition of the far-right leader Marine Le Pen will quite likely lead to a collapse of the government this week. With no new election able to be held before next summer, this can only lead to an intensification of the political paralysis which has dogged France ever since Macron’s ill-fated decision to call a snap election in June.
The prospect duly sent a few tremors through the French bond market and briefly rather incredibly led to French yields moving above Greek yields. But with yields only touching 3%, this is more about the amazing rehabilitation of Greece – Greek yields topped 40% at the height of the Eurozone debt crisis in 2012 – than a surge in French yields.
While action to bring down the French budget deficit – which is running at a high 6% of GDP – will now be difficult, a major crisis looks very unlikely. That said, along with the political problems in Germany where elections are now due in February following the recent collapse of that government, this all leaves the Eurozone poorly placed to deal either with its structural growth problems or the turbulence no doubt soon to be heading its way from the US.
This coming week is relatively light on macro data outside the US, where the main focus will be the payroll numbers on Friday.
Rupert Thompson – Chief Economist