For the second week running, President Trump managed to trump any economic data released. Last week it was all about Venezuela, this week Greenland. Trump announced over the weekend that from 1 February he will impose tariffs of 10% on the UK, Norway and the six EU countries who recently sent a handful of troops to Greenland – rising to 25% from 1 June until a deal is agreed for the US to purchase the country.
The EU is apparently considering rather more forceful retaliation than in last year’s tariff negotiations with the US. Talk is of imposing $93bn of tariffs and/or limiting US companies access to the single market via its ‘anti-coercion instrument’. Meanwhile, Starmer this morning seemed to play down the possibility of UK retaliatory tariffs. All this occurs ahead of the meeting of the great and the good at Davos later this week, which will see a frantic attempt to de-escalate the crisis.
The market reaction this morning was on the face of it surprisingly muted with the FTSE 100 down a modest 0.6%, the pound actually up 0.2% and European equities down 1.5%. But gold loves a good old Trump shock and has risen a further 1.5% on top of its 2.0% gain last week.
The market’s muted reaction appears to be a re-embracement of last year’s infamous TACO (Trump Always Chickens Out) trade. The average US tariff currently is only 15%. While a big jump from 3% before, it is a far cry from the 25% level threatened on Liberation Day – the 100% tariffs imposed on China last year only ended up lasting a matter of months.
While the latest developments clearly increase the tail-risks further, it is the still relatively rosy base case that the markets are focused on. Our approach is to remain well diversified in our positioning, which should allow us to benefit from further market gains but equally provide some protection if market were to turn tail.
Prior to Trump’s weekend intervention, last week saw global equities notch up further gains of another 0.5% or so. Whereas the US was flat in sterling terms, other markets rallied with Europe, the UK, Emerging Markets and Japan seeing gains of 0.6%, 1.1%, 2.6% and 4.3% respectively.
Japan fared particularly well as PM Sanae Takaichi indicated she would call a snap election next month and it was confirmed today this will be held on 8 February. The hope here is that she will win a majority, enhancing her mandate to implement her market-friendly policies.
On the macro front, the US inflation numbers took rather a back seat this month. They came in a bit lower than expected but continuing doubts over the quality of the data following the government shutdown limited the market reaction. Headline and core inflation were both unchanged in December at 2.7% and 2.6% respectively.
The data did little to change the market’s perception that the Fed will hold off cutting rates again until April. Trump is due to announce the successor to Fed Chair Powell in coming weeks and last week saw him back away from Kevin Hassett, one of the two favourites. This leaves Kevin Warsh, a former Fed Governor and possibly bit less of a Trump frontman than Hassett, as the front-runner.
In yet another intervention, Trump threatened last week to impose a cap of 10% on credit card interest rates from 20 January. How this will be implemented and whether it will even come about – as indeed is the case with Trump’s recent plan to ban institutions from buying single family homes – remains far from clear.
The move on credit cards rather took the limelight away from the fourth quarter results of the big banks. These were generally solid but failed to offset the credit card angst and US banks ended the week down 3.9%.
Away from the Trump show, China reported this morning that the economy had grown 5.0% last year, by coincidence exactly hitting its growth target. While doubts over the veracity of these numbers are justified, the fact still remains that Chinese growth is holding up reasonably well. Domestic demand continues to be weighed down by the bursting of the property bubble but exports are making up the shortfall. Indeed, China’s trade surplus last year increased to a massive $1.2tn.
Back here in the UK, the latest GDP data provided a welcome bit of cheer on the state of the economy. GDP rose a larger than expected 0.3% in November, helped by a recovery at Jaguar Land Rover. This left activity up 0.1% over the last three months – rather than down 0.2% as feared.
This coming week, the annual shindig at Davos will be centre stage because of the discussions over Greenland. On the macro front, UK labour market and inflation numbers are out on Tuesday and Wednesday, US inflation data on Thursday and US, EU and UK business confidence figures on Friday. There is also a Supreme Court ruling on the legality of Trump’s existing tariffs looming sometime over coming weeks, as well as the announcement of the new Fed Chair.
Rupert Thompson – Economist