Written by Ashwin Gurung
Last week, President Donald Trump imposed steep tariffs on Canada, Mexico, and China, marking the beginning of a new era of trade tensions between the US and three of its largest trading partners. The executive order includes a 25% tariff on most imports from Canada and Mexico, with an additional 10% tariff on Chinese goods.
In response, Canadian Prime Minister Justin Trudeau announced 25% tariffs on $107 billion worth of US goods, including alcohol, clothing, and lumber. He cautioned that these tariffs could hurt US jobs and raise costs for consumers, including higher prices for food and gas. Likewise, China retaliated with tariffs on US energy exports and farm equipment. Although Chinese tariffs are now in effect, President Trump has agreed to hold off tariffs on Canada and Mexico for 30 days while negotiations continue. President Trump has also hinted that the European Union (EU) may face tariffs next but stated that trade issues with the UK “can be worked out”. These actions reflect rising global trade tensions among major economies. As a result of these uncertainties, global markets saw a sharp decline on Monday but mostly recovered over the remainder of the week.
The release of US Nonfarm Payrolls (NFP) report further contributed to market volatility. While the data showed 143,000 jobs were added in January, which was below expectations, the revised December figure was more notable, increasing from 256,000 to 307,000. Additionally, the unemployment rate decreased from 4.1% in December to 4% in January, indicating the continued resilience of the US economy. This caused both US stocks and government bonds to come under pressure, as it suggests the US Federal Reserve may be forced to cut interest rates more slowly this year. However, it’s important to remember that these short-term figures are subject to multiple revisions and may not fully reflect long-term trends. Overall, it was a negative week for US stocks as measured by the S&P 500 which returned -0.2% in GBP terms, however, global bonds still ended the week in positive territory with the Bloomberg Global Aggregate Index up +0.4% in GBP hedged terms.
Nonetheless, corporate earnings in the US have remained strong this earnings season. Over half of the companies in the S&P 500, representing a significant portion of its market capitalisation, have reported their fourth-quarter results, where more than 60% exceeded sales estimates, while approximately 75% beat earnings forecasts. However, the most notable outlier was Google’s parent company, Alphabet, whose share price fell by 8% on the day of their results following weaker-than-expected revenue numbers and significant AI spending plans.
Meanwhile, here in the UK, the Bank of England (BoE) reduced its 2025 growth forecast and cut interest rates by 25bps to 4.5%, the lowest level in 18 months, with two of the committee members voting for an even greater cut. The BoE now expects just 0.75% growth in the UK economy this year, down from its previous forecast of 1.5%, and anticipates inflation to rise before falling back. However, BoE Governor Andrew Bailey stated that the BoE did not factor in the potential impact of tariffs on inflation forecasts, as the situation remains highly uncertain.
Although the week started negatively, with investors worried that US tariffs could spark a global trade war, expectations of lower interest rates helped drive the FTSE 100 Index of large-cap UK listed stock to a record high, ending the week with a +0.3% gain. However, more domestically focussed mid-cap stocks reacted more negatively to the economic growth downgrade, with the FTSE 250 Index returning -0.6% for the week.
With ongoing uncertainty, we believe maintaining diversification across multiple asset classes, market caps, and investment styles is crucial for navigating these risks more effectively.
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