Written by Dave Gorman, Investment Manager and Chair of Equity Committee, TEAM PLC
The week was once again dominated by President Trump and his agenda amidst other headline grabbing news, including the serious skirmish between India and Pakistan, the potential for a ceasefire in the Russia/Ukraine war and the election of a new pope.
Since Trump’s own ‘Liberation Day’ on 2 April, financial markets have proved exceptionally volatile. However, in recent weeks that volatility has waned and with it the stock market has rapidly recovered lost ground. This is down to the market discounting that the President will have success in orchestrating new trade agreements with global partners that resets the needle more in favour of the US.
The market has given an acronym to the Trump approach. This is TACO – standing for ‘Trump always chickens out.’ It reflects the view that the US administration’s tough talk should be discounted as pragmatism will prevail. We have seen Trump back down on his extreme rhetoric when the going gets tough – the biggest was the 90-day delay in imposing the so called ‘reciprocal tariffs’.
This delay is clearly a negotiation tactic to get trade partners to the table. Sure enough, last week we had, with much fanfare, a signed trade agreement between the US and the UK. Discussions on this had been in the works for years but the reality is that it was more important politically rather than economically.
Where US tariffs on UK goods were 3.4%, they are now 10% (the baseline tariff) but importantly the UK car industry breathed a sigh of relief as they are able to export roughly the same number of cars as last year without the threat of the ‘25% car tariff.’ Meanwhile, the US tariffs are reduced from 5.1% to 1,8% – no question who got the better deal!
The weekend trade talks between the US and Chinese delegates culminated in Monday’s joint announcement that both countries have put most tariffs on pause for 90 days. US tariffs on Chinese imports are cut to 30% from the previous 145%, while China’s tariffs will drop to 10% from the current 125%.
This has profoundly increased optimism that the US will make a comprehensive shift in the threat of imposing ‘reciprocal tariffs’ in the future. Major markets enjoyed a strong bounce on Monday with major US companies climbing such as Apple, Amazon and Microsoft.
Commodities, including oil, copper and iron ore, also moved sharply higher. Brent Crude rallied from a 4-year low of $60 a barrel to close at $65 on Monday, on the eve of President Trump’s visit to Saudi Arabia, Qatar and the UAE.
News that the US Federal Reserve kept interest rates unchanged last week was not a surprise with Chair Jerome Powell reiterating that policymakers ‘will wait and see’ how the trade war impacts jobs and inflation. Closer to home the Bank of England’s Monetary Policy Committee cut interest rates by another quarter point cut. Opinion was divided with two members voting for a full half point cut and another two members for no change. The rate cut will help variable rate mortgage holders and those that opt for a new purchase with a shorter-term fixed interest rate.
We are now at the tail end of the first quarter corporate earnings reporting season which has proved particularly good. In the US. Around 75% of the S&P500 companies have surpassed expectations, posting year on year earnings growth of 14%. Forward guidance from companies has, however, been problematic due to the lack of visibility and the risks to the economic outlook are highly uncertain. Forecasts for this year are still nudging downwards and unless we see earnings upgrades, the current investor optimism may be misplaced.
This week will see huge speculation on how the US/China negotiations will fare in the coming months. Elsewhere, we will have the latest US inflation number for April that is forecast to be 2.4% even though the full impact of tariffs has still to impact. US retail spending may come under pressure given tariff nervousness although the American consumer has a habit of proving resilient.
