The week that was …
Economic round-up
US interest rates
As had been widely expected, the US Federal Reserve cut interest rates by a quarter of a percentage point, dropping the lending rate to a range of 3.5% to 3.75%, the lowest since 2022. The minutes from last week’s meeting showed the Federal Reserve Committee remains divided over the direction of rates from here. Read more from the BBC here
UK economy edges back again
The UK economy contracted by 0.1% over October, with speculation around the Budget holding back growth. Consensus among economists had been that the economy would end the month flat, having fallen 0.1% in September. Read more from Sky here
US trade deficit narrows
The US trade deficit narrowed to its lowest level in more than five years in September. The gap between exports and imports of goods fell by 11% from the previous month to $52.8bn (£39.45bn), according to data released by the US Department of Commerce. Read more from the FT here
China inflation high
China’s consumer inflation climbed to its highest level in nearly two years in December, while producer price deflation deepened. Consumer prices rose 0.7% year-on-year, in line with economist expectations. Read more from the CNBC here
Mexico greenlights tariffs
Mexico has approved tariffs of up to 50% on Chinese cars and other goods, as it looks to preserve its free-trade deal with the US in 2026. The Mexican Senate voted to confirm the levy, proposed in September, which will apply to about 1,400 types of imported goods. Read more from the FT here
China should fix imbalances – IMF
China needs to fix the “significant” imbalances in its economy, according to International Monetary Fund (IMF) managing director Kristalina Georgieva, because deflation has driven a depreciation of the renminbi and boosted exports. China’s annual goods trade surplus will exceed $1tn this year. Read more from the FT here
Markets round-up
US indices slip
The S&P 500 and Nasdaq indices fell last week, after weak results from Broadcom fuelled concerns about AI profitability. The chipmaker’s shares slid 8.4% after it warned of lower margins on its AI system sales. Read more from Reuters here
Oil market faces ‘super glut’ in 2026
The oil market could face price pressures from a “super glut” in 2026, as new supply collides with weakness in the global economy, according to Saad Rahim, chief economist at commodity trader Trafigura. Brent crude has fallen 16% over 2025 to date, leaving it on track for its worst year since 2020. Read more from the FT here
Silver hits new highs
The price of silver hit a record high last week, while gold prices also rose. The catalyst appears to have been a weaker dollar and the US Federal Reserve’s interest rate cut. Read more from Reuters here
Investors bet on rising Eurozone rates
Swap-markets pricing implies the European Central Bank is more likely to increase rates in 2026 than cut them, which could weigh on an already weak dollar. The US Federal Reserve is expected to make at least two further cuts next year. Read more from the FT here
“The quality index still has plenty of highly valued companies within it, but there are pockets where valuations look compelling – and which ought to provide some protection should markets weaken in the year ahead.
Selected equity and bond markets: 05/12/25 to 12/12/25
| Market | 05/12/25 (Close) |
12/12/25 (Close) |
Gain/loss |
|---|---|---|---|
| FTSE All-Share | 5241 | 5200 | -0.3% |
| S&P500 | 6870 | 6827 | -0.6% |
| MSCI World | 4419 | 4408 | -0.2% |
| CNBC Magnificent Seven | 427 | 419 | -2.0% |
| US 10-year treasury (yield) | 4.14% | 4.18% | |
| UK 10-year gilt (yield) | 4.48% | 4.53% |
Investment round-up
FCA publishes targeted support rules
The FCA has published its near-final rules for targeted support – a policy aimed at addressing the advice gap. Once the relevant legislation is in place, firms will be able to apply for permission to provide this kind of support. Read more from Pinsent Masons here
Fidelity makes senior MPS appointment
Fidelity has appointed Graham Folley to lead its model portfolio service and intermediary solutions businesses. In a newly created position, Folley is expected to lead the development and delivery of the group’s MPS and intermediary solutions proposition.
Quilter Cheviot to offer private market exposure
Quilter Cheviot has partnered with KKR to offer private market exposure in its discretionary portfolio service from January via KKR’s flagship private equity evergreen fund, K-Prime. The offering will be restricted to clients with £500,000 of investable wealth.
Jupiter launches smaller companies ETF
Jupiter Asset Management has partnered with ETF specialist HANetf to launch the Jupiter Origin Global Smaller Companies UCITS ETF (JOGS) on the London Stock Exchange and Swiss SIX exchange. The actively managed ETF will charge a total expense ratio of 0.45% and will be run by the five-strong London-based Origin team Jupiter bought last year.
Saba ups SDCL trust holding
Saba Capital has doubled its holding in SDCL Efficiency Income Trust to just over 10%. The activist hedge fund has taken the position largely through total return swaps.
GSAM launches active ETFs
Goldman Sachs Asset Management has launched three actively managed exchange-traded funds, focused on developed and emerging market debt. The funds will be managed by Goldman Sachs’ Fixed Income and Liquidity Solutions team.
… and the week that will be
UK interest rate decision
A rate cut of 0.25% would appear all but nailed-on when the Bank of England meets on Wednesday, with all economists polled by Reuters believing a cut to be on the cards. Although inflation remains elevated, it was drifting lower last week and, with economic weakness increasingly evident, the central bank’s Monetary Policy Committee is likely to flip towards easing. Read more from Reuters here
US data flowing again
It will be a big week for economic news, as fresh data finally starts to emerge after the federal shutdown, including delayed jobs, inflation and retail sales reports. Federal Reserve chair Jerome Powell warned last week, however, the CPI data and unemployment rate would be less reliable than usual due to a lapse in data collection. Read more from MSN here
The week in numbers
UK interest rates: The Bank of England’s Monetary Policy Committee is widely expected to cut UK rates to 3.75% on Wednesday.
Eurozone interest rates: The European Central Bank is expected to hold eurozone interest rates at 2.15% at its meeting this week.
Japan interest rates: The Bank of Japan is expected to hike Japan’s interest rates by a quarter point to 0.75% this week.
UK inflation: Consensus forecasts have UK prices rising 3.4% in November – down from 3.6% year-on-year – and falling 0.1% month-on-month. Core inflation is expected to slow to 3.3%, year on year, from 3.4% last month.
UK retail sales: Consensus forecasts have UK retail sales rising 0.4% over November, following a 1.1% drop the month before.
UK employment: Consensus expectations for the October unemployment rate is a rise to 5.1% from 5% the previous month, with average earnings rising 4.5%, compared with 4.8% in September.
UK business sentiment: The flash December reading of the UK’s manufacturing purchasing managers index (PMI) is forecast to rise to 51.2 from 50.2, with the services equivalent rising to 52 from 51.3.
Japan inflation: Consensus expectations have year-on-year inflation in Japan falling to 2.9% in November, from 3% the previous month. Core inflation is meanwhile expected to fall to 2.7% from 3%.
Japan business sentiment: The flash December reading of Japan’s manufacturing PMI is expected to rise to 49.5 from 48.7, with the services equivalent dropping to 51.6 from 53.2.
China economic data: Consensus expectations for November data from China have retail sales up 3.3% and industrial production up 5.4%.
In focus: Quality heat
Fund managers who focus on quality companies have had a tough old time of late. The most high-profile casualties have been Nick Train and Terry Smith but others who favour this investment approach have also struggled. Still, could this area of the market now represent an opportunity in the coming year?
Over 12 months, the MSCI World Quality index is around 5% behind the broader MSCI World benchmark. To be clear, the likes of Alphabet, Meta, Microsoft and Nvidia are all represented in the Quality index – just not at quite the same level as for the MSCI World.
“The quality index does have some of the big technology names in it but they are not as high a weight,” says Dr Ian Mortimer, manager of the Guinness Global Equity Income fund. “It has more companies in the healthcare and consumer staples sector. It has also had less exposure to some of those more value-oriented names that have done very well in Europe – banks, for example.”
Ben Peters, manager on the Evenlode Global Income fund, adds: “Thinking about where the action has been in the market, the weakness of quality companies kind of makes sense. Banks and capital goods companies that have historically generated low returns on capital have been on the up, as well as unprofitable technology companies.”
Equally, as Peters goes on to point out, quality tends to come into its own in more difficult environments. “Quality’s outperformance since the turn of the millennium has come in times of economic or market stress,” he says. As such, the bull market that has persisted since the end of 2022 perhaps does not make for ideal conditions for quality to thrive. That said, the magnitude of the weakness is surprising.
“While directionally we might expect solid businesses to underperform in a robust economy, the magnitude of the differential for certain businesses has been dramatic,” Peters says. Also, he adds, the global economy is patchy rather than robust – an environment in which quality companies with predictable earnings and revenues should have been more in favour.
As monetary conditions stabilise and earnings visibility improves, confidence in forward cashflows is being restored.”
The question for investors is whether this could change in 2026. Quality is not necessarily very cheap. It has historically traded at premium to the broader market – and still does, with the quality index on a price/earnings (P/E) ratio of 25.6x, while the broader index is on 24.2x. Quality companies also have a lower dividend yield – 1.28% versus 1.58% – a higher forward P/E ratio and a significantly higher price-to-book value.
Yet many fund managers see real opportunities in certain areas of the quality index. “Consumer staples generally trade at a 10% to 15% premium to the broader market” says Mortimer. “These are good, understandable businesses and investors are usually happy to pay up for that. If you see the premium drop, it can be a good opportunity. Today, it is actually at a discount and yet, when you look through, some of those businesses are doing quite well.”
The same case could be made for healthcare, says Mortimer, adding: “It has been very out-of-favour. Over the past couple of months, though, it has become more in favour and there has been quite a big re-rating.” Some of the healthcare stocks have been very weak and created a disproportionate effect on quality strategies – Novo Nordisk, for example, is down almost 50% over the year to date.
At the same time, the sector has been buoyed by agreements on drugs pricing between major pharmaceutical groups and the US government, which removes a key element of uncertainty. The share prices for listed biotechnology companies have also been supported by increasing M&A activity.
According to Mark Denham, head of equities at Carmignac and manager on the FP Carmignac European Leaders Fund, history offers a pattern of how rebounds have tended to unfold and he sees similarities with 2022- the last major rotation from quality to value.
“As monetary conditions stabilise and earnings visibility improves, confidence in forward cashflows is being restored,” he explains. “This backdrop supports multiple expansion, especially for high-quality companies with durable business models and pricing power, creating attractive entry points for long-term investors.”
Neat narratives ignore the messy reality of markets where differing actors bid prices up and down for variant reasons, and correlations that seem plausible and even explanatory can change or break down through time.”
There is also a diversification argument for upping exposure to quality companies as areas such as consumer staples have historically proved defensive in the face of market weakness. By the law of averages alone, markets may be due a correction and some quality businesses could provide portfolio protection in the event of broader market weakness.
That said, it is important not to be too simplistic, warns Peters. “Quality as an idea has shown itself to be valuable over long periods of time,” he says. “In these periodically strange sorts of markets, as we are undoubtedly in now, it is particularly important to look beyond the style and focus on its application to individual companies. Neat narratives ignore the messy reality of markets where differing actors bid prices up and down for variant reasons, and correlations that seem plausible and even explanatory can change or break down through time.”
In a recent newsletter, Nutshell Asset Management suggests that pairing quality characteristics with robust valuation metrics will be important, adding: “While quality as a standalone factor has faced headwinds from elevated valuations, pairing it with a rigorous relative value lens allows us to capture durable fundamentals without overpaying for them. With more than a third of the portfolio now trading at decade-low valuation levels, we believe the current opportunity set is unusually attractive.”
There are clearly now opportunities among quality companies – but investors would be well-advised to be selective. The quality index still has plenty of highly valued companies within it, but there are pockets where valuations look compelling – and which ought to provide some protection should markets weaken in the year ahead.
Read more on this from Evenlode here
In focus: Powell dance
The Federal Reserve duly cut US interest rates last week but – unusually – markets greeted the news with a shrug. Partly, this was because the cut had generally been viewed as a ‘sure thing’ yet the accompanying statements were relatively hawkish and so gave markets pause for thought.
While Fed chair Jerome Powell dismissed talk of potential rate rises in the coming months, the so-called ‘Dot Plot’ indicated just one rate cut for 2026. Equally, the members of the Federal Open Market Committee had offered a broad range of opinions. The vote was split three ways, with two votes for no change and – not altogether surprisingly – Trump appointee Stephen Miran voting for a 0.5% cut.
This divergence of opinions is unusual and may be significant. “Fed chair Powell suggested the bar for further cuts was high, saying in the post-meeting press conference that rates were ‘now within a broad range of estimates of its neutral value, and we are well positioned to wait to see how the economy evolves’,” notes Anthony Willis, a fund manager at Columbia Threadneedle.
For his part, David Roberts, co-portfolio manager of the Nedgroup Investments Global Strategic Bond fund, says there has been pressure on government bonds but US treasuries now look more appealing. “Market pricing across the G7 suggests many central banks might raise rates in 2026,” he continues. “The Fed is expected to cut once more – however, a reasonably dovish Powell press conference coupled with a new chair come May could suggest the risk is yields might go lower than forecast.
“At the time of writing, US bonds have rallied well inside their recent range, having appeared vulnerable. Current levels close to 4.15% could prove attractive buying levels and, if the Fed does cut several times in 2026, double-digit returns cannot be ruled out.”
There is also some concern over a potential decoupling between labour markets and inflation. This would complicate future decision-making for the Federal Reserve. It is possible that, as the effects of AI start to bite, economic growth – and potentially inflation – could come at the same time as ever-weaker jobs data. The appropriate level of interest rates in that environment would be difficult to judge.
Forecasting the direction of interest rates in 2026 is increasingly difficult and it may be that markets are now starting to realise that. If so, it could be the key factor weighing on markets in the last weeks of 2025.
Read more on this from Project Syndicate here
