The week that was …
Economic round-up
* The Bank of England cut interest rates by 0.25%, bringing the base rate to an 18-month low of 4.5%. All of the Monetary Policy Committee members voted for a cut, with two – Swati Dhingra and Catherine Mann – suggesting a 0.5% cut. Read more in ‘In focus’ below
* House prices hit new highs in January, with the average property price now £299,138, according to mortgage lender Halifax. The market may have been given a boost from buyers keen to complete before a rise in stamp duty at the end of March. House prices rose 0.7% in the month after a dip of 0.2% in December. Read more from the FT here
* The UK has yet to be on the receiving end of Donald Trump’s new tariff regime, but companies are still bracing for a potential impact. If tariffs are imposed, companies that export to the US could face higher charges immediately, while others may feel the impact through their supply chains. Read more from the Independent here
* US jobs growth slowed in January, as employers added 143,000 jobs. This was below analyst expectations. Unemployment remained low, ticking up from 4% to 4.1%. The data is unlikely to shift the view of the Federal Reserve that only two interest rate cuts will be necessary in the year ahead. Read more from the BBC here
* Eurozone inflation unexpectedly ticked higher in January, with CPI showing a 2.5% rise, against analyst expectations of 2.3%. This is the third month in a row the data has been above the European Central Bank’s target of 2%. Higher prices have largely been driven by rising energy costs. Read more from the FT here
Markets round-up
* Stockmarkets wobbled early in the week as Donald Trump imposed tariffs of 25% on Mexico and Canada, and threatened to do the same in Europe. It hurt markets across the world, including the US, but pushed up the dollar. Markets subsequently recovered as the US president’s tariff plans for Mexico and Canada were deferred. Read more in ‘In focus’ below
* Amazon saw its share price slide, after the e-commerce giant’s fourth quarter earnings missed analysts’ expectations. The earnings data reinforced ongoing investor concerns around spending on artificial intelligence. In particular, Amazon Web services, the group’s cloud-computing arm, was weak. Read more from the Independent here
“Investors finally received some clarity on Donald Trump’s long-threatened tariff regime over the week – albeit a Trumpian kind of clarity that was quickly replaced with further complexity.
Selected equity and bond markets: 31/01/25 to 07/02/25
Market 31/01/25(Close) 07/02/25 (Close) Gain/loss
FTSE All-Share 4711 4710 Flat
S&P 500 6040 6026 -0.23%
MSCI World 3863.5 3832.8 -0.10%
CNBC Magnificent Seven 348.1 339.8 -2.40%
US 10-year treasury (yield) 4.541% 4.496%
UK 10-year gilt (yield) 4.539% 4.481%
Investment round-up
* Shareholders of the European Smaller Companies trust voted against the requisition proposal advanced by US activist investor Saba Capital. This was the sixth defeat for the activist. Edinburgh Worldwide is next up for a vote on 14 February. Excluding Saba’s own votes, the result was close to unanimous, with 99.5% of votes cast against Saba’s plan to replace the board. Read more from Trustnet here
* Funds under management ended 2024 at £1,509bn – an increase of 6% since the end of 2023. Net retail outflows fell to £1.6bn, according to Investment Association data, compared with £26.9bn and £24.3bn in 2022 and 2023. Index-tracking funds took in a record £28bn in 2024, exceeding the previous record inflow of £18.4bn in 2020. They now represent a quarter of the overall market.
* British Columbia Investment Management Corporation, a Canadian institutional investor, is set to acquire the BBGI Global Infrastructure trust. The offer price of 147.5p per share represents a 3.4% premium to the estimated net asset value of 142.7p per share as at 31 December 2024. The board has recommended accepting the takeover. Read more from Trustnet here
… and the week that will be
Tariff mania (again)
It promises to be another rollercoaster week of tariff announcements from the White House. Donald Trump has started with a 25% import tax on all steel and aluminium entering the US, but did not specify which nations would be targeted. In his first term, the US president levied tariffs of 25% on steel imports and 10% on aluminium imports from Canada, Mexico and the European Union. Read more from the BBC here
UK GDP – any reasons to be cheerful?
Markets will be watching for any ray of hope from the UK GDP figures released this week. The Bank of England has already downgraded its growth forecasts, and the OBR reports on 26 March. The EY ITEM Club Winter Forecast predicts UK GDP growth of 1% in 2025, down from the 1.5% growth projected in the group’s October forecast. It believes the slowdown at the end of 2024 will be temporary and predicts steady quarter-on-quarter growth. Read more from the Bank of England here
The week in numbers
US CPI (January): Prices are expected to rise 0.3% month-over-month from 0.4%, and 2.9% year on year, in line with last month.
UK Q4 gross domestic product: GDP growth is expected to rise 1% year on year and hold at 0% quarter on quarter .
US PPI (January): Initial jobless claims are expected to fall to 215,000 from 219,000.
US retail sales (January): Sales are forecast to be flat, month on month.
Company results: Companies reporting results this week include Barclays, Barrett, BP, Coca-Cola, Redrow and Unilever.
In focus: ‘Tariffs and buts’
Investors finally received some clarity on Donald Trump’s long-threatened tariff regime over the week – albeit a Trumpian kind of clarity that was quickly replaced with further complexity.
The week began with a flurry of executive orders imposing 25% on Canadian and Mexican imports, plus a 10% additional tariff on Chinese goods coming into the US. Canadian energy saw a lower tariff of 10% – Canada provides more than half of US oil imports. Trump threatened similar tariffs on the European Union, although the UK – for the time being – appears to be out of the firing line.
The imposition of tariffs technically requires approval from the US Congress, except in emergencies. That said, Trump can impose tariffs through executive orders in the case of emergencies. For this reason, he invoked the International Emergency Economic Powers Act “because of the major threat of illegal aliens and deadly drugs killing our citizens, including fentanyl”.
All three countries announced immediate retaliatory tariffs. Despite Trump’s assurance that it would all be “worth the price”, posted on social platform Truth Social, economists warned that US consumers would not be immune, and the tariffs could lead to prices rising on a wide range of products. By the end of the day – and following some concessions on border security – the tariffs on Mexico and Canada had been deferred.
The tariffs on China remain but, given Trump’s threats of 60% tariffs on Chinese imports during his election campaign, Chinese policymakers may be relieved he has settled at 10%. According to Andrew Swan, head of Asia at Man GLG, the outlook for US interest rates may ultimately prove to be more important than the tariff regime for equity markets in Asia. “If you look at equity markets in Asia, you wouldn’t think tariffs had been introduced because they’ve been pretty resilient,” he added.
“What the market is saying is that this is a negotiating tool – that it is being used not just in China, but around the world. Plus, the administration is proving that it can be transactional. There is optimism that there will be a transaction rather than just tariffs. That’s why the equity market is holding up – and time will tell if that is correct.”
Swan went on to suggest tariffs probably had less impact today than they did eight years ago. “China and the world has learned to live with tariffs,” he explained. “Supply chains are diversifying. China’s reliance on the US has diminished. We are living in a multi-polar world and individual countries are putting their own interests first, rather than being told what to do.”
Another question is whether tariffs could ultimately benefit China. Swan saw other countries moving closer to China and said this could accelerate if the US continues to prove itself to be “a faithless ally”. After all, it was Trump who agreed the original trade deal with Mexico and Canada in his first presidency, on which he has now been threatening to step back.
It will be worth keeping an eye on the technology sector as the European Union has made it clear it will go after US tech businesses should Trump decide to impose tariffs on it. The EU threatened to use its ‘anti-coercion instrument’ (ACI) – a tool brought in to defend the US against the last round of Trump tariffs – which allows the EU to impose trade restrictions on services if a country is using tariffs on goods to force changes in policy. In this case, the EU would suggest Trump’s threats over Greenland qualify.
The ACI allows the bloc a range of retaliatory actions, including revoking the protection of intellectual property rights or their commercial exploitation – for example, software downloads and streaming services. Technology managers, however, remain sanguine, with Mike Seidenberg, manager on the Allianz Technology Trust, noting: “Tech as an industry seems reasonably immune. The software industry doesn’t sell to China. Mexico and Canada are countries that matter, but I would be much more concerned if it was the UK and US in a tariff war. Other industries have a lot more exposure to tariffs.”
Certainly, this has been reflected in market pricing so far, with some obvious points of vulnerability. The drinks manufacturers, for example, have struggled. Diageo withdrew its sales guidance in its results statement this week. Its US sales are driven by Crown Royal, made in Canada, and Don Julio, made in Mexico. The auto sector has also been under pressure, alongside the chemicals and pharmaceutical industries.
“Pharmaceuticals, automotives and chemical products are the most exposed sectors to any potential US tariffs, as they represent the lion’s share of EU exports to the US,” opined a report by Morningstar. “Smaller industries, however, such as aluminium, steel and even Scotch whisky, which were targeted between 2017 and 2021, are also exposed to a potential sales reduction.” These sectors that have been hit hardest in the recent volatility. That said, some fund managers have pointed out that opportunities may emerge, with share price falls overdone.
It is also worth recalling the 2018/19 trade war between the US and China was not an unmitigated success for the US. “That had a significant impact on the US economy,” pointed out Kristina Hooper, chief global market strategist at Invesco. “It caused disruptions, price increases – which squeezed some businesses’ profit margins – and elevated uncertainty, which led to stalled US business investment and hiring.”
She concluded that tariffs create volatility while their long-term effects may be relatively small, adding: “Protectionist measures have tended to result in less optimal economic growth globally in the near term but have not necessarily served as a long-term hurdle for the stockmarket. Nonetheless, a period of trade policy uncertainty could potentially weigh on markets, as it did in 2018/19, until greater clarity emerges. We could see a similar scenario unfold this time as we did in the first Trump administration – lots of drama but no real longer-term impact. I am cautiously optimistic that will be the case.”
Read more on this from the FT here, from Morningstar here and from Columbia Threadneedle here
In focus: Rate expectations
The Bank of England cut UK interest rates by 0.25% last Thursday. While this would appear to provide some reprieve for Chancellor Rachel Reeves, the Bank of England’s gloomy prognosis on the UK economy, plus its explicit condemnation of the impact of the National Insurance rise for businesses, quickly dampened any celebration.
The Monetary Policy Committee was unanimous in its support for a cut in rates, with two members wanting to go further with a 0.5% cut. This suggests the market may be too pessimistic about the prospect of future interest rate rises. Goldman Sachs, for example, has predicted quarterly cuts to interest rates throughout the year and into 2026, until the Bank Rate hits 3.25% in the second quarter of 2026.
For his part, Vivek Paul, UK chief investment strategist at BlackRock, pointed out gilt yields had already come down a long way – from 4.9% in early January to below 4.5% today. “We also think multiple further interest rate cuts are likely and indeed two Monetary Policy Committee members today voted for a 50-basis-point cut,” he added. “On balance, we think that makes current yields broadly reasonable relative to where we think they will be in five years – though we watch for the risk of embedded stagflation.
“We stay overweight UK gilts on a long-term, strategic horizon. We see both foreign and domestic risks in the near term. The Office for Budget Responsibility’s forthcoming assessment of the UK’s finances – and the government’s reaction – will be key.”
Laith Khalaf, head of investment analysis at AJ Bell, was less optimistic, pointing to the Bank of England’s forecast that inflation would peak at 3.7% this year, while the economy continues to flirt with recession. “CPI at 3.7% is nowhere near the double-digit inflation we saw at the height of the cost-of-living crisis, but it adds to the cumulative load of price rises,” he added.
“It also sets up the potential for a round of higher salary negotiations and, with wage growth already running hot, this might stoke further inflationary pressures. The Bank can control these by keeping interest rates higher, which would mean more sustained pain for mortgage borrowers and for companies refinancing debt.” Rising energy prices are the primary culprit for higher inflation, Khalaf said, although hikes in NI and VAT on school fees were also contributing.
Growth continues to look anaemic, with the Bank of England announcing a significant downgrade to its forecasts. Khalaf suggested it was increasingly likely Reeves would take action in the Spring Statement in March. It is all looking distinctly stagflationary.
Read more on this from Goldman Sachs here, from the Independent here and from Jupiter here
