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Trump up the volume

28 Jan 2025 | 3 minutes to read

A good week for

  • Equities (except UK) added between 1% and 2.9% in local currency terms
  • Gold advanced +2.5% in dollar terms

A bad week for  

  • The US dollar fell -2.5% versus sterling
  • Brent crude oil slipped -2.8% in dollar terms

Trump returns

President Trump signed around 100 executive orders in his first week and showed restraint on trade. Having threatened tariffs on key trading partners – Mexico, Canada, China and the EU – he only prepared for them as leverage in geopolitical negotiations. Trump withdrew from the World Health Organisation, suspended foreign aid for three months, and took the US out of the Paris Climate Agreement, a process expected to take a year. The US is the biggest financial supporter of the WHO, the UN’s global public health agency, and the world’s second biggest emitter of CO₂ in absolute terms.  Critics suggested that these withdrawals could harm both global human health and inhibit action to mitigate the worst effects of global warming. Additionally, Trump is pushing to fast-track permits for new fossil fuel projects.

Trump also declared a ‘national emergency’ at the Mexican border, deploying troops and targeting birthright citizenship, while suspending the refugee admissions program. This could hinder the supply of cheap labour in the US and may prove inflationary.

With the level of the US fiscal deficit ~6.7% of GDP, and the yield on 10-Year Treasuries ~4.5%, economic reality will likely limit what Trump can do on the fiscal front. Nonetheless, at the World Economic Forum in Davos he expressed support for ‘massive tax cuts for US workers and families.’

Market reaction to Trump

US indices advanced between 1.4% and 1.7% last week with the S&P 500 hitting a record high, and the Volatility Index (VIX) dropping more than 7%. The rally was driven by strong corporate earnings, Trump’s pro-business policies and his relatively dovish initial stance on China tariffs. In Davos, Trump said he would incentivise companies to produce more on U.S. soil, lest they face tariffs. He also urged the Organisation of the Petroleum Exporting Countries (OPEC), including Saudi Arabia, to cut oil prices, saying that would lower inflation and consequently interest rates. The key US 10-Year Treasury yield and dollar weakened a little during the week.

UK

UK Chancellor, Rachel Reeves, was also in Davos with a pro-growth message to kick-start the UK economy, talking up housing and infrastructure development, hinting at support for a third runway at Heathrow, and at more slowly phasing out the facility permitting ‘non-doms’ to repatriate funds to the UK. The government ousted the Chair of the UK’s competition watchdog, the Competition & Markets Authority (CMA), saying the body was insufficiently fostering a growth-friendly environment. Furthermore, Reeves also took the unusual step of intervening in a UK Supreme Court hearing on motor finance commission, which could reduce the compensation lenders might face, arguing that the Treasury should contribute evidence in a case which might “cause considerable economic harm” were it to make car finance less obtainable and more expensive. Labour’s pro-growth message certainly represents a change of gear amid other mixed news: whilst UK wage growth rose over the three months to the end of November, insolvency practitioner, Begbies Traynor, reported a record jump in the number of UK businesses in critical financial distress. A barrage of poor economic data recently and the arrival of the Trump administration, are undoubtedly significant factors in Labour’s altered direction.

BoJ Hikes

Last week the Bank of Japan (BoJ) raised its target interest rate by 25bps to 0.5%, as expected. With inflation forecast to remain above 2% for the next year, another rate increase could come in May 2025 if spring wage negotiations drive inflation higher. BoJ Governor Ueda stated that real interest rates remain negative, with monetary conditions currently accommodative for businesses. Rising utilities and food prices, particularly rice, drove December’s annualised core inflation rate to 3.6%, slightly above consensus estimates of 3.4%.

In other news

  • Open AI, SoftBank and Oracle announced a JV infrastructure fund worth ~$500bn over 4 years
  • Netflix added almost 19m subscribers in Q4 2024, to 300m total, forecasting growth and engagement - especially outside the US
  • Gold advanced back towards all-time highs over $2,750 per ounce

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