Last week was one of some drama, not that one would have guessed looking at where markets ended up. Global equities were little changed, up 0.2% in local currency terms and down 0.5% in sterling terms. The US underperformed with a decline of 1.1% in sterling terms while the UK and emerging markets fared best with gains of 0.6-0.7%.
Bonds were also broadly unchanged with UK gilts down 0.2% and US Treasuries flat. Even gold, which surged as much as 15% only to fall back in short order, ended the week unchanged in sterling terms.
The big news came on Friday with the long-awaited announcement of who Trump is to nominate to take over in May from Jay Powell as Fed Chair. Trump has selected Kevin Warsh who was a previous Fed Governor and has been viewed as one of the top contenders for the last couple of months.
Warsh is seen as having rather more orthodox views and being a bit less of a Trump yes-man than some of the other candidates. He has been an inflation hawk in the past but now apparently believes the coming boost to productivity from AI will keep inflation down and supports lower rates. However, he also favours cutting the size of the Fed’s balance sheet, which might imply restarting quantitative tightening which has only recently been halted by the Fed.
In short, it is unclear exactly how his views will play out in practice. But as far as the markets are concerned, the important point is that someone with some credibility has been appointed, easing fears on this front. The market fractionally reduced its expectation for US rate cuts but is still pricing in two more 0.25% reductions by year-end.
This followed the Fed meeting on Wednesday which was a non-event as expected. Rates were left on hold at 3.5-3.75% with Chair Powell stating that policy was well positioned, suggesting the Fed is in no hurry to lower rates again. The next cut is now not anticipated until June, by when Warsh will be in charge.
The dollar also strengthened a bit on the Warsh news but still ended the week down 1.2%. It was undermined earlier in the week by speculation that the US and Japan might intervene to prop up the yen and comments by Trump that the dollar’s recent fall was great news.
But this was then followed by Treasury Secretary Bessent stating that the US was committed to a strong dollar policy, reminding markets that the dollar is yet another area where US policy is to say the least both rather less clear-cut and more volatile than desirable.
Gold has certainly taken a dim view of all the policy uncertainty, with its already substantial gains this year followed by a surge to close to $5,600/oz on Thursday. However, this proved a step too far and has been followed by a swift retreat back below $5000/oz.
The sheer size of its recent gains, which were fueled in part by retail investors jumping on the golden bandwagon, inevitably sowed the seeds for a temporary retreat. However, the fundamentals behind the strength of the gold price very much remain in place – most notably the desire by central banks to diversify away from the dollar and the risks posed by US policy.
One such risk remains very much alive, namely the danger of a confrontation between the US and Iran following the recent build-up of American forces in the region. Oil is the asset most exposed to any such conflict, with around 20% of global production being transported through the Straits of Hormuz. Crude oil prices rose 7% last week to $70/bbl but have retreated to $66 this morning on Trump’s comments that Iran was ‘seriously talking’ with Washington.
Lastly, we had results from Microsoft, Meta and Apple, prompting very different reactions from the market. This is in keeping with the pattern of late which has seen the performance of the companies making up the Magnificent Seven diverge significantly. Microsoft ended the week down a hefty 7.7% while Meta and Apple were up 8.8% and 4.6% respectively.
Investors are no longer viewing the Magnificent Seven as a single homogeneous group which will be carried forever higher by AI. Instead, their results are being pored over ever more closely in a bid to assess whether their massive spending on data centres is justified and which of the tech titans with their various competing models will be the ultimate winners in the AI race.
This coming week, assuming – and it is a rash assumption – that Trump doesn’t dominate the headlines once again, attention will move back to the macro data. US business confidence numbers are released during the week, along with payroll data on Friday. We also have meetings of the Bank of England and European Central Bank on Thursday but both look set to leave rates unchanged and to be as dull as ditchwater. On the earnings front, the focus will be on Alphabet and Amazon which report on Wednesday and Thursday respectively.
Rupert Thompson – Economist