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Harry Brassington of Team Asset Management offers this week’s market review
WE started this week in quieter fashion, with the US stock market and Wall Street closed for Presidents’ Day but plenty of noise surrounds the markets, with the ever-unpredictable Donald Trump as master of ceremonies.
It was Bloomberg’s headline that caught the most attention when it came to dealing with the noise: Just keep buying! And, sure enough, buy they did. A record US$95 billion was poured into the US stock market last week in the form of leveraged ETFs, securities designed to magnify the returns of a stock or index. Great on the way up, but remember that leverage works both ways…
For a sense of the current euphoria, during the liquidity-fuelled meme-stock mania of 2021, led by poster child Game Stop, the record weekly inflow in leveraged ETFs was US$68 billion, some 30% lower.
Bulls will argue that there is plenty to shout about, as 80% of the members of the bellwether S&P 500 large cap index have now reported their earnings, which have been surpassing many analysts’ expectations. The loudest among them have been in the banking sector, smashing forecasts on both the top (revenue) and bottom (margin) lines.
The beat goes on in Europe. Although we await the key earnings, there is much positivity to be taken against a rather dreary backdrop of Europe’s own political problems. HSBC is expected to deliver bigger profits as its large-scale cost-cutting exercise begins to pay off, and Airbus’s forecast is expected to soar above expectations on the back of more plane deliveries this year.
Meanwhile, Trump’s influence over geopolitics has provided some positivity against the sea of uncertainty, as Trump the negotiator brings Putin to the table to begin peace talks. European defence stocks were the big winner as government promises over security boosted stocks that are key beneficiaries of increased defence spending.
However, the trade war is good for absolutely nothing. Trump’s threat to impose US tariffs on UK steel looms large, but the move could be bad news for both countries. The UK’s steel exports to the US are specialised, according to business secretary Jonathan Reynolds. UK steel is used in US Navy ships, including submarine casings. Any tariff would drive up the cost for the US department of defence and ultimately be paid for by the US taxpayer.
But the big surprise was reciprocal tariffs. The UK was less exposed to the raft of tariffs announced by the US, but the surprise inclusion of VAT used in the calculation of tariffs has caused unrest among British business. This new style of calculating tariffs on a country-by-country basis is a departure from the universal import tariffs previously announced and will ultimately be determined by whatever Donald Trump deems to be fair for the US.
Closer to home, UK businesses are laying out their plans ahead of the Chancellor’s budget which is due to come into force in April. Many companies have said that there will be job losses, less hiring and price rises as they come to terms with a double header of higher national insurance contributions and higher minimum wages.
Employment and wage growth was at its highest level in eight months in the final quarter of the year. Such mixed data and uncertainty for the future will be sure to give the bank of England a headache as it battles sluggish growth and tries to bring inflation under control.
The week ahead will bring some clues to the pace of interest-rate easing. All eyes will be on the Federal Reversal meeting minutes, while in the UK, the all-important inflation numbers are due out today.
