Global equities have started the year full of New Year cheer, gaining 1.7% last week in local currency terms and 2.1% in sterling terms. The big news was the US capture of President Maduro in Venezuela and President Trump’s increasingly aggressive intentions towards Greenland. But the market gains are hardly down to these developments which are more likely to trigger alarm bells than celebration.
With one notable exception, markets are generally remarkably impervious to geo-political events unless they carry immediate implications which are minimal in this case. The most obvious effect and a stated aim of the US move on Venezuela is to ramp up its oil production. But the necessary investment to achieve this will take years. Despite the prospect of increased supply down the road, the oil price actually ended the week 2% higher – rather than lower.
As for the longer-term implications of Trump’s latest actions, they are far from insignificant. Indeed, they could potentially herald a further fracturing of the NATO alliance and can only make China less fearful of the US response if it were to make a move on Taiwan. But both such eventualities are at this stage still just tail risks and so not a current source of market angst.
Gold is the one asset class which just loves a bit of geo-political stress and was up as much as 4.2% over the week, testing $4500/oz for the first time.
Last week saw the release of the keenly awaited US payroll report for December but this turned out to be a mixed bag and didn’t really change the state of play much. Namely, the labour market has softened considerably but is not weak enough to pose a material risk to the economic recovery. Payrolls grew a bit less than expected but this was offset by the unemployment rate unexpectedly reversing its recent rise.
The latest US business confidence numbers also painted a mixed picture. Manufacturing sentiment remained in recessionary territory – despite all Trump’s hullabaloo about the revival in the industrial sector heralded by the tariff hikes and the surge in foreign investment – but service sector confidence improved significantly.
The upshot is that the US economy continues to hold up reasonably well and should continue to do so, helped in part by the tax cuts in Trump’s big, beautiful bill which will shortly start to show up in consumers’ pay packets. This resilience means the markets expect the Fed to hold off from cutting rates again in January with the next reduction now not anticipated until April.
So why were equities up last week? Most likely, investors returned to their desks buoyed by the spate of generally upbeat market forecasts for the coming year. The equity rally also took a pause in November and December and the latest gains merely resume the underlying upward trend. We subscribe to this reasonably bullish outlook – as we outlined in last week’s commentary – because in a nutshell, the positive macro backdrop looks likely to outweigh high valuation levels.
There was no big divergence in regional equity performance last week with all the main regions up 2-2.5% in sterling terms. Last week’s performance, however, hides the fact that over the winter, the US has been underperforming again – a trend we expect to continue. It is up a modest 1.2% over the last month versus 4.0% for the rest of the world.
AI, the Magnificent Seven and the tech sector more generally continue to dominate the headlines. But in terms of market performance, it is a very different story of late. The basic materials sector led last week’s increases, gaining 4.5% and is now up 9% over the last month, benefiting from relatively cheap valuations and the rally in industrial metal prices. The financial sector has also returned 8%. Both gains are a far cry from the 1% decline recorded by tech stocks.
The last noteworthy event to report is that Rachel Reeves has rather belatedly and surprisingly made a new friend. The gilt market returned 1.4% last week as gilt yields continued their recent decline. 10-year yields are back down to 4.4%, down from the highs of 4.8% touched earlier in the year when fiscal worries were at their height.
This coming week, the fourth quarter US earnings season will move into focus with the big banks kicking off reporting on Tuesday and Wednesday. Most likely, we will see the S&P 500 recording another double-digit gain in earnings. We also have US inflation and retail sales numbers out on Tuesday and Wednesday and UK GDP data on Thursday.
Rupert Thompson – Economist