Global equities retreated last week for the second week running, falling around 1% in both local currency and sterling terms. Meanwhile, UK gilts and US Treasuries gained 0.9% and 1.4% respectively, benefiting from a fall in yields. They have fallen most in the US, where 10-year yields are down to 4.2%, well down on their mid-January high of 4.8%.
The recent retreat in equity markets has highlighted the benefits of having an allocation to government bonds, at least when a risk-off move is triggered by growth fears rather than inflation worries. While global equities are now down 2.5% in both local currency and sterling terms from their mid-February high, UK gilts and US Treasuries have returned 1-2% over this period.
UK large cap were much the best performer last week with the FTSE 100 up 1.9% in contrast to the declines seem in most other markets. Defensive sectors such as healthcare and consumer staples have held up well and the FTSE has benefited from its high weighting in these areas. It was also aided by its minimal exposure to the tech sector which led last week’s declines.
So why are defensive stocks outperforming? The answer is that a spate of weak US economic data has led to markets worrying about a sharp slowdown in US growth. Last week’s news of a larger than expected drop in consumer confidence in February and consumer spending in January reinforced the weak picture painted by the previous week’s numbers.
While this recent downturn in the US consumer cannot be dismissed out of hand, it is far too early to read too much into it. After all, it was only in the fourth quarter that consumer spending saw its strongest gain since the start of 2023. Some slowdown in US growth looks very plausible, not least because of all the uncertainty engendered by the incessant policy announcements of Trump and Musk, but a fall into recession still seems very unlikely.
It would have been strange if there were no new tariff announcements last week and Trump didn’t disappoint. Just as it had begun to look as if he was fully focused on his new enemies rather than his old ones, he threatened China with an additional 10% tariff, on top of the 10% hike already imposed in February. He also announced plans to tighten further the restrictions on high tech exports to China.
The EU is clearly viewed as an old enemy judging from Trump’s recent comment that the EU was set up to screw the US. Anyway, it is firmly in his firing line with 25% tariffs apparently to be imposed soon. Only the UK appears to have escaped Trump’s wrath, with Starmer’s visit sweetened by King Charles’s invite and ending even with talk of a limited trade deal.
We will keep our comment on the most memorable of the recent visits by heads of state to Washington to a minimum. Suffice it to say, that while any peace dividend to Europe from a ceasefire in Ukraine seems at a minimum to have been delayed, the boost coming from increased defence spending looks all the more secure. Merz, the German chancellor-in-waiting, is trying to push through a €100bn rise even before his new government takes office. And the UK is upping its defence spending by £6bn from 2.3% of GDP to 2.5% by 2027.
Last but not least, we had Nvidia report its fourth quarter results on Wednesday. Revenues and net income were both up a stellar 80% or so on a year earlier. But operating margins were down a bit and the results were not quite as fantastic as the market has come to expect. The stock ended the week down 7%.
Nvidia is far from the only one of the Magnificent Seven to have lost some of its lustre of late with the group overall down 6% year-to-date. But it is Tesla which has really taken a dive despite Musk’s bromance with Trump, falling 27% ytd and reversing the bulk of its immediate surge on Trump’s victory.
Musk may not yet have fallen out of love with Trump but the markets certainly have. Much, or in some cases all, of the moves associated with the initial Trump love-in, be it US equities outperforming, US small cap outperforming large cap, or the surge in the dollar and bitcoin, have been reversed in recent weeks.
This coming week, the US business confidence and payroll numbers will be centre-stage, even more so than normal given the current angst over US growth. Canada and Mexico will also be a focus with US tariffs seemingly set to be imposed on them on Tuesday following their initial reprieve, as will China which will be setting its growth target for the coming year. Finally, the ECB looks certain to cut rates a further 0.25% to 2.5% on Thursday.
Rupert Thompson – Chief Economist