Weekly Market Recap

‘Liberation Day’ arrived on Wednesday (2 April), and the measures announced were at the more severe end of expectations. We understand from leaks that the Trump administration was still debating at what level to set tariffs until the eleventh hour, but they seemed pretty set by the time President Donald Trump spoke in the White House Rose Garden.

Although the President ordered a review of all unfair trade restrictions, the actual tariffs were set at half the level of each country’s trade surplus against the U.S. If that seems arbitrary, what was even more so was the fact that countries in deficit to the U.S. were still hit with a tariff, undermining any credibility to the spurious claim that surpluses are evidence of protectionism.

It is an outrageous opening offer from a president who prefers making deals to policies. As he says in his book ‘The Art of the Deal’, “I always go in with a very low offer, and I always assume that the other side will negotiate.” But has he overplayed his hand?

After the Trump bump, the Trump hump and into the Trump slump

U.S. equities have noticeably underperformed European stocks, with individual companies reflecting the folly of protectionism. Apple has a business model in which its manufacturing is done in China and Vietnam, two countries at the more severe end of U.S. tariff announcements.

Maybe this is activity the U.S. would like to be conducted at home, but it doesn’t have the capacity to do so. Nike is a great example of an iconic American brand whose high value-added activities take place in the U.S., while the manual and laborious manufacturing activity takes place where labour is cheaper. Bringing those jobs to the U.S. relies upon American workers being willing to do the work.

President Trump is ready to make deals, but whether there’s any scope to reduce the baseline 10% tariff seems highly questionable, and some potential growth has been diminished. For decades, he has lauded the tariff and bemoaned America’s trade deficit, so he sees tariffs as here to stay, and they’ll be oppressive until the U.S. trade deficit comes into balance.

However, tariffs won’t achieve that objective and so will remain in place. The scope of them is likely to be reduced somewhat, though due to the president’s fondness for making deals. Coupled with his clampdown on immigration, some of the key tenets of U.S. exceptionalism are being undermined, and it makes sense to look more widely for investment opportunities.

U.S. added 209,000 jobs in March

The backdrop for last week’s tariff announcements was supportive of a tough Trump bargaining position.

The most obvious data point was Friday’s non-farm payroll report, which showed that a consensus-beating 209,000 new jobs were created in March. This was a surprisingly strong figure, which suggests an acceleration of hiring relative to previous months, quite at odds with the depressed business surveys that have been prevailing recently.

In terms of caveats, the last two months did see downward revisions, but they weren’t huge with signs from the latest shunto (annual spring wage negotiations) that companies are willing to countenance higher payments.

U.S. jobs growth was surprisingly strong in March

The unemployment rate rose slightly more than expected, which always seems unintuitive when jobs growth has been strong. This can sometimes be reflective of immigration, although that seems less likely at the moment. Instead, more Americans are entering the job search, which is reflected in a slight recovery in the labour force participation rate.

It’s a little surprising to see these data strengthen. Whilst surveys can be unreliable, particularly at emotional times when there’s a lot of partisanship, there are some distinct reasons for employment to weaken this month that seem incontrovertible; the Department of Government Efficiency (DOGE)’s federal spending cuts, for example.

Whilst it’s difficult to trust the accuracy of the cost-cutting achievements DOGE has published, executive outplacement firm Challenger, Grey and Christmas estimated this week that over 200,000 federal workers had been laid off during March alone. The official data only showed a few thousand job losses, so it may be that the bulk of them appear in next month’s revisions.

Whether accurate or not, President Trump will be emboldened by the apparent strength of the labour market, which will make him a tougher negotiator for trade partners. The good news is that the rise in the unemployment rate, relatively subdued wage growth, and increased labour participation will help make the case that the Federal Reserve should cut interest rates.

(Almost) all that glimmers is gold

Gold sold off on ‘Liberation Day’ as investors took profits, reflecting the fact that bullion is one of a handful of goods that are exempted from tariffs (the others are critical minerals).

The new government is thinking strategically about access to natural resources, and they won’t be the only ones. Central banks have been building up their non-dollar reserve assets in anticipation of a time when requiring a lot of dollars may be less of a priority.

That has been the trend that has pushed gold higher and, aside from the exemption, ‘Liberation Day’ should encourage reserve managers that their diversification strategy is appropriate.

Coming up this week – 8 to 15 April 2025

Tariffs (again):

The common 10% tariff rate began over the weekend, but the individual tariff rates will take effect from Wednesday 9 April (unless they’re changed).

U.S. earnings season:

The results of Q2 will be released at the end of the week.

Inflation data:

U.S. inflation data released on Thursday (10 April) should show the annual rate slowing, although this will likely be the calm before the storm.

Last week was supposed to be the calm before the storm of U.S. President Donald Trump’s self-styled ‘Liberation Day’, when tariffs will be imposed on a range of the country’s trading partners.

The week saw plenty of information and disinformation over when the tariffs will come, before seeing a surprise announcement on Wednesday relating to taxes on car imports.

U.S. announces 25% tariffs on cars

President Trump imposed 25% trade tariffs on vehicles and car parts last week. According to the White House, the move was made in the interest of national security, for which the automotive industry is a vital component. The tariff on finished vehicles will apply from 3 April, while the tariff on parts will be imposed a month later.

President Trump has consistently expressed his frustration over the practice of building cars in other countries before selling them in the U.S.

This new policy aims to encourage more car manufacturing in the U.S. instead. The president hopes this will increase U.S. employment and reduce the U.S. trade deficit. The U.S. sells around 15 million vehicles per year, with some demand having probably been brought forward in anticipation of tariffs.

The U.S. currently produces around 10 million vehicles annually and, at a stretch, it appears to have capacity for 13 million. Over time, the shortfall can be met through additional investment in auto plants, which take a couple of years to build.

There are two important questions to be asked:

1. How long will the tariffs need to remain in place to make executives willing to commit to expensive new plants in the U.S?

2. By the time the plants are erected, how long will be left of President Trump’s term, at the end of which policies may be different?

Japan ponders retaliation against auto tariffs

Around 28% of Japan’s exports to the U.S. are cars, so the country will be impacted by this latest tariff announcement. Japanese Prime Minister Shigeru Ishiba insists that all options are on the table when it comes to retaliation.

However, Japan has moved a lot of its car manufacturing to America, and so a portion of its sales will be protected. Economic consultant Capital Economics estimates that around 70% of sales by Japanese firms to U.S. companies are already manufactured in the U.S.

So, despite the considerable threat from the imposition of tariffs, interest rates are still expected to rise in Japan. Members of the Bank of Japan’s Monetary Policy Board seem concerned that food price inflation could be persistent, and there have been signs from the latest shunto (annual spring wage negotiations) that companies are willing to countenance higher payments.

At a time when other countries are pondering how fast to cut their interest rates, Japan is poised to continue hiking, especially since consumer prices in Tokyo on Thursday remained stronger than anticipated, which will therefore be true of the equivalent nationwide inflation measure, too.

UK economy gives mixed signals

Friday saw the full release of the UK’s 2024 gross domestic product (GDP) numbers. The economy grew by just over 1% last year, despite some pre-election giveaways by the outgoing administration. The new government shone a light on the fiscal situation, and in doing so cast a shadow over UK consumer confidence.

Whilst Friday’s numbers show just how turgid the second half of 2024 was, they do reveal that during the final quarters, the combination of growing real wages and cautious spending led the saving rate to reach nearly 12th the highest figure since 2010, indicating that UK consumers have been saving.

The benefit of that was felt in January and February; retails sales figures seem to suggest that the UK consumer headed back to the shops in the first months of the year. The benefit was also seen in the UK services purchasing managers index (PMI), but below the surface of a strong rebound lies some gloom in the form of contracting employment, which is a response to rising employment costs.

The increase to Employers National Insurance contributions, which was announced in the 2024 Autumn Budget will take effect from this April. The new tax year will also see first-time buyers paying Stamp Duty Land Tax (SDLT) when buying a home, ending a preferential treatment that saw them exempt from paying any SDLT on properties worth up to £425,000.

Inflation was below forecasts, but this was mainly due to a few volatile items. We know that utility bills will be back on the rise in April, which means inflation will be back above 3% for the rest of the year.

The economy seems stronger in the first quarter of 2025, but inflation is persistent. The Bank of England’s Monetary Policy Committee seems keen to cut interest rates at least twice over the next year, but it will be banking on a slowdown in inflation (excluding utility bills).

In the Spring Statement on Wednesday, the chancellor confirmed that government spending was on track to break one of her fiscal rules. The government had been on track to spend £9.9 billion less than it was receiving in 2029/30, but rising interest rates meant that this headroom had been lost.

Over the previous week, the government announced welfare cuts that will take effect from April 2026, in addition to further economic measures.

By extraordinary coincidence, the £9.9 billion headroom was restored but as the last six months have shown, such a small margin means that every time interest rates seem to rise, the prospect of more taxes or spending cuts in autumn will rise.

Upcoming events:

Global Purchasing Managers’ Index (PMI):

The temperature of most major economies will be taken this week with the S&P Global PMI (and the Institute of Supply Managers surveys in the U.S.)

U.S. employment:

The U.S. is expected to announce on Friday (4 April) that 135,000 new jobs were created during March.

‘Liberation Day’:

President Trump will announce reciprocal tariffs on trading partners on Wednesday (2 April).

Surveys suggesting trade uncertainty has made consumers and businesses wary (though surveys around politicised events can be unreliable). Weak sentiment indicated a potential rebound. However, several factors conspired to slow economic activity in early 2025.

Trade pain and the pain trade

The so-called ‘Trump slump’ paused for breath last week, and the performance of regional equity markets became generally more uniform.

The ‘pain trade’ is the tendency of the market to move in a way that causes the maximum possible pain to the largest possible number of investors. It happens when there’s a very widely and strongly held consensus, such as the belief that U.S. President Donald Trump’s second term would bring a boost to growth from deregulation and tax cuts, and that the artificial intelligence (AI) boom would continue.

In 2008, the U.S. equity market was around 1.5 times as big as the European equity market. By the end of 2024, it had ballooned to more than five times the size. That means any rebalancing from the U.S. to Europe can have a disproportionate impact on the latter. It pays to be aware of these technical factors to distinguish them from fundamentals.

Over the same period, U.S. earnings outpaced European earnings by a similar amount. Fundamentally, U.S. companies continue to be much more profitable than European companies and so demand a premium valuation.

Although there has been some deregulation, the market’s focus has been on surprisingly aggressive U.S. trade policy (which seems to have few winners and many losers) and the sudden realisation in Europe that the region would need to re-arm itself.

Are U.S. consumers spending less?

The most obvious rationale for the sell-off in U.S. equities has been the onset of trade tariffs. They seemed to be the trigger, but so far, their impact on the economic data has been restricted to surveys.

It will be some time before tariffs show up in the wider economic data, but we can see some evidence of weaker economic activity that pre-dated any tariff announcements. One example of this is U.S. retail sales data, which suggests a decline in consumer spending.

U.S. retail sales data has generally underwhelmed, and last week’s announcement did show a further decline in sales at food services and drinking establishments. This could suggest that consumers are going out less, although during the winter, we do see occasional lulls in eating out due to adverse weather conditions.

It looks like the U.S. consumer has been cutting back over the last four months or so. The onset of tariffs may cause them to do so more. Certainly, those who might be reliant upon the state for salary or welfare will be anxious over efforts to rein in government spending. But the U.S. economy has been growing comfortably, at more than 2% a year for the last two years, so there’s plenty of scope for a slowdown without it triggering a recession.  

UK announces public spending reductions

Last week, the UK’s Work and Pensions Secretary Liz Kendall announced planned reforms to disability benefits. The government believes the measures will save more than £5 billion per year by the end of the decade. The measures are being consulted on but have drawn sharp criticism from Labour backbenchers.

The government hasn’t given figures, but independent assessments suggest the reforms could strip over a million people of their benefits. The measures coincide with the UK’s pledge to increase defence spending and come ahead of the Spring Statement this Wednesday.

Over the weekend, Chancellor Rachel Reeves announced civil service costs will be cut by 15%. The cuts will come from back office and administrative functions and will be achieved through greater use of technology and productivity tools.

It’s expected that the Office for Budget Responsibility (OBR) will reveal that the government is in breach of its fiscal rules due to a combination of factors. Data released on Friday showed a continued shortfall in the UK budget, with borrowing during February exceeding OBR estimates. The shortfall could be £1.6 billion according to estimates by Capital Economics.

The government has said that it won’t be increasing taxes in the Spring Statement, so it will need to announce more spending cuts (assuming it doesn’t loosen the fiscal rules).

The fiscal rules are one constraint, but they can be fudged. Cuts in the future can be endlessly deferred, but the chancellor must also convince the lenders (i.e. the bond market) that the government is on a fiscally sustainable track.

less fungible constraint is the impact that increased borrowing would have on market interest rates. As the UK’s fiscal position deteriorated earlier in the year, we saw a sharp rise in bond yields, and the UK remains in the focus of the bond markets.

UK interest rates were kept on hold last week as the Bank of England balanced the competing pressures of too high wages, an apparently slowing jobs market, and the probability of some form of modest fiscal tightening.

Coming up this week

UK Spring Statement

On Wednesday, UK Chancellor Rachel Reeves will deliver the Spring Statement. She’s expected to announce further measures to rein in borrowing (but will not, apparently, increase taxes).

Inflation reads

The last of the inflation estimates for February will be released. We’ll see UK consumer price index and retail price index numbers, but also the U.S. personal consumption expenditure price index, the Federal Reserve’s preferred measure of price growth.

More inflation reads

There’s still a week to go until ‘Liberation Day’ (as President Trump calls it), the day when reciprocal tariffs are announced on an as yet unknown group of countries.

Last week saw dramatic escalation and then de-escalation in U.S. President Donald Trump’s global trade war.

After the imposition of 25% tariffs on steel and aluminium import, measures that will severely hurt Canada’s metal production sector and mean higher metals prices for American manufacturer, Canada’s Ontario premier Doug Ford announced he would impose a 25% surcharge on electricity supplied by Canada to America’s northern states.

The response?

President Trump declared he would double the tariff on Canadian steel. Both sides have since withdrawn. The 25% tariffs remain in place. The European Union announced its retaliatory tariffs, which will come into effect in April should the U.S. import taxes remain in place.

President Trump again signalled he would retaliate if the EU implemented these tariffs. By April, there may be more tariffs on EU exports to the U.S. This will depend on U.S. investigations into the need for reciprocal tariffs to counter any trade restrictions that other countries are deemed to have put in place, including value added tax (VAT).

There have been two distinct phases to the market action since last year’s U.S. election. The first was a repeat of the ‘Trump bump’ experienced in his first term. This took place after the election result confirmed there would be a second Trump term. Investors reacted to the prospect of a Trump presidency, anticipating benefits such as reduced regulation and the possibility of tax cuts.

However, even during the last stages of the Trump bump, European equities had begun to pick up steam and following his inauguration, the Trump bump has become a Trump slump! European equities have broadly managed to continue rising despite a sharp sell-off for global equities, which is almost entirely driven by the U.S.

‘American exceptionalism’ has flourished over the era of global trade

U.S. exceptionalism has been a remarkable trend over a long period. The U.S. began outperforming following the great financial crisis in 2007-2008. Several stars had aligned for this. The U.S. tech sector finally emerged from the shadow of the tech bubble.

Meanwhile, Europe suffered from a debilitating debt crisis and saw a slowdown in China and other emerging markets, which had been strong markets for European exports for many years. As the economy continued to digitise, America’s economy outperformed.

It was aided by more favourable demographics, fortuitous natural resource wealth, a dynamic business environment, and capital inflows from other countries, which kept borrowing costs low despite constant budget deficits.

Many of the conditions that have allowed the U.S. to rise to the top of the pack are being challenged by the Trump administration’s unironic pledge to Make America Great Again.

Could populism force the world’s biggest economic success story to give up its crown? The odds still seem strong for America to remain exceptional.

Its geographic benefits are outstanding from a geopolitical and economic perspective because it’s easily defensible and accessible to trade, with incredible natural resource wealth. Europe, on the other hand, is fragmented, with a Russian aggressor on its doorstep.

The largest U.S. companies have remarkable monopoly power and an unrivalled position in the coming artificial intelligence revolution. There’s controversy about how highly their leadership position should be valued, but the fact they’re the leaders is beyond debate.

How are tariffs affecting business sentiment?

Small business owners usually appreciate a Republican president, but Trump 2.0 is testing their patience.

There has been a meaningful sell-off in U.S. equities despite there being little evidence of economic weakness from companies and economic statistics. However, surveys hinted that change is afoot.

A couple of weeks ago, anecdotal comments within the purchasing managers indices (PMIs) indicated a more nervous business community. Last week, this sentiment was reflected by the National Federation of Independent Businesses (NFIB), which had originally cheered the arrival of a new Republican administration.

It still considers now a better time to expand its businesses than at most points during Joe Biden’s presidency, but it’s noticeably less ebullient about it now than just weeks ago. That’s because the threat of tariffs is likely to mean higher costs, with the risk of disrupted supply chains and, for those who export, the possible imposition of retaliatory tariffs.

For many companies, there’s no choice but to pass those additional costs on to clients. In the long term, some companies have pledged to move manufacturing into the U.S. as President Trump wants. But building new plants for manufactured goods typically takes years, so there’s no quick fix to this threat if the tariff is going to remain until companies have genuinely shifted their production.

The potential impact of tariffs is difficult to quantify, especially as the specific targets, levels and duration of the measures remain uncertain, but we shouldn’t be too concerned by dramatic shifts in survey data.

There have been instances of surveys suggesting very pessimistic economic outcomes only to rebound when respondents have a better idea of what the new business environment is going to be like.

Brexit would be a good example of this. The immediate impact of these tariffs will be far more material than the years of inaction over Brexit, but that doesn’t prevent people from overreacting in surveys.

Peak bearishness – prime buying opportunities?

The American Association of Individual Investors (AAII) business sentiment survey has been a terrific barometer of stock market overreaction in the past. It has now risen to levels that have been associated with some of the most timely ‘bottoms’ in the stock market over recent decades.

Peaks in bearishness, as per this measure, that were recorded in March 2003, March 2009 and September 2022, were all tremendous buying opportunities for the coming years.

In each of those instances, the market was considerably more depressed than it is at the moment, so we probably can’t expect the dramatic gains they offered. But it does indicate that the tariff message has hit investors hard, which sets up the potential for a rebound.

Coming up this week

Monetary policy: Major central bank decisions are on the agenda this week. The Bank of England, the Federal Reserve, and the Bank of Japan are all setting monetary policy, although none are expected to change their current stance (for this month at least).

UK growth: High wage growth is holding the UK back from cutting interest rates. Data on Thursday will reveal whether it has slowed at all.

On Tuesday last week (4 March), the U.S. imposed 25% tariffs on most imports from Mexico and Canada. The exceptions to this were potash (a fertiliser used in farming) from both countries and energy products from Canada, which would be tariffed at a reduced rate of 10%.

Canada, however, has been quick to react with retaliatory tariffs, including an export tariff on the electricity it provides to northern U.S. states, which is designed to impose a real cost on U.S. consumers. Over the weekend, former governor of the Bank of Canada Mark Carney successfully contested the leadership of the Liberal party and will soon become prime minister.

Referring to the trade war, Carney said “We didn’t ask for this fight, but Canadians are always ready when someone else drops the gloves.” Earlier today, in response to those retaliatory measures, U.S. President Donald Trump announced that tariffs on Canadian aluminium and steel would be increased to 50% on 12 March.

By last Wednesday (5 March), it seemed there would need to be an exemption for the car industry, because many products cross the border several times during the manufacturing process. Car makers argued that subjecting their crossborder supply chain activity to tariffs that European and Asian carmakers don’t suffer from puts America at a disadvantage.

It’s unclear why this took until Wednesday to recognise because it had been widely discussed during the presidential campaign. An exemption was granted on Thursday for goods traded under the United States-Mexico-Canada Agreement (USMCA), the agreement negotiated by President Trump’s first administration.

Investors are bracing for the impact of President Trump’s erratic trade policy. This U-turn on Mexican and Canadian tariffs follows an eleventh-hour decision last month to defer their implementation until 4 March. The president lauded the progress made in the fight against fentanyl imports since the tariffs were first threatened.

However, he promised there won’t be another deferral in April, when reciprocal tariffs on Mexico and Canada are due to come into effect following a review. The seemingly endless stream of deferrals and modifications to the Canadian and Mexican tariffs follow February’s attempt to end the tariff exemption on small packages (which had to be temporarily halted due to logistical challenges related to enforcement).

It’s surprising that these challenges hadn’t been foreseen. However, the Trump administration has seemed to be in a state of disillusionment over the effect of tariffs and trade. President Trump believes companies in another country selling goods to Americans are effectively ripping America off, and that producers pay tariffs; overwhelmingly, it’s consumers who pay them. This is not a widely held opinion.

The art of the deal war

Perhaps what’s most surprising about his approach is his apparent desire to go after all other countries at once (assuming he follows through with promised reciprocal tariffs in April). Analysts acknowledged ahead of the election that the U.S. would be in a strong position to negotiate with other countries under the threat of tariffs because trade doesn’t actually make up a particularly large share of the U.S. economy.

However, it seems this position of strength is being squandered. Other countries may trade more, but if the U.S. imposes tariffs on all trading partners simultaneously, as President Trump seems to be suggesting, and if those trading partners impose counteracting tariffs, this raises the amount of U.S. trade subject to tariffs relative to peers, who’ll be trading largely tariff free between each other.

Thousands of years of military strategy, dating back to Sun Tzu’s text ‘The Art of War’, contains variations of the idea that the best path to success is to ‘divide and conquer’. Whilst not a warrior, the Trump administration seems more willing to unite its rivals. Perhaps it’s telling that in his negotiating guide ‘The Art of the Deal’, Trump never really addresses the power dynamics that come from collective or individual negotiations (despite this being a tried and trusted path to negotiating success).

The effects seem telling. Business surveys have shown a marked deterioration in confidence. In some cases, this has been reflected in less activity. In others, the shoe seems likely to drop in coming months. Companies struggle to explain how they’ll react to tariffs because they don’t know what these tariffs will be. It seems reasonable to believe that a company might be more willing to invest in a new U.S. plant than a non-U.S. plant given the threat of tariffs.

However, the decision to invest at all might be in question if you don’t know what tariff you’ll pay on imported components, or how much of a tariff advantage there is to invest in the U.S., relative to the much higher labour costs.

The only certainty is uncertainty

Some business surveys include anecdotal comments from submitters. Almost all of them are negative at the moment, and most of them cite tariffs as the reason for anxiety. An example that stands out from the Institute for Supply Management (ISM) manufacturing survey says: “Management now has us running scenarios to project tariff impacts to our business. They want numbers in 24 hours on variables that equate to a wild guess. Interesting times we live in.”

This shows how difficult it is for companies to make decisions when the taxation of imports changes almost by the day. A number of retailers reported earnings last week, and so the topic of tariffs came up with management. Very few companies have anything significant to say in terms of their mitigation strategies.

Commentary tends to make trite references to leveraging global buying power and focusing on value for customers. Very few know exactly what the impact will be or can do much about it in the short term. There has been some evidence of a slowing U.S. economy. The Citigroup Economic Surprise Index edged below zero, suggesting the economy was performing worse than expected.

Perhaps most extraordinarily, the Federal Reserve of Atlanta’s current estimate of gross domestic product (GDP), (‘nowcast’), known as GDPnow, fell sharply at the beginning of last week. The biggest detractor came from the sharp increase in imports.

Imports reduce GDP while exports increase it, but as businesses anticipate an increase in tariffs, they try and buy ahead of the tax increases. That effect should reverse in coming months, notwithstanding the constantly moving tariff environment.

U.S. consumer confidence drops

However, beyond this, there also appears to have been a more pronounced drop in consumption. This seems likely to reflect an increase in economic caution. Reduced retail sales and weaker confidence surveys have been the clearest indications that the economy is turning.

The U.S. labour market broadly held firm. The non-farm payroll report showed employment creation was weaker than expected and the unemployment rate rose unexpectedly. However, some of that impact is due to a higher-than-average number of workers being unable to work due to bad weather.

Government employment will receive lots of scrutiny as the impact of the Department of Government Efficiency builds. So far, federal government employment was only down by 10,000 jobs in February, but next month will be a better test.

There was some reassuring news on inflation, with lower-than-expected wage growth. Given the weak economic data momentum recently, this firmed up bond markets’ expectations of three rate cuts from June this year.

Forget MAGA and get MEGA

Whilst President Trump’s activities may be dampening economic activity in the U.S., they seem to be accelerating it in Europe. An acrimonious meeting between President Trump and Ukrainian President Volodymyr Zelenskyy saw the U.S. halting aid and ending intelligence sharing with Ukraine.

The move was a devastating blow to Ukrainians and a boost to Russia. It had a galvanising effect on Europeans. On Tuesday evening, German leaders announced their intention to reform the constitutional debt brake to essentially allow for open-ended borrowing for defence. It would also allow for the creation of a €500bn special purpose vehicle for infrastructure investment.

The announcement came on the same day that European Commission President Ursula von der Leyen proposed her ‘ReArm Europe’ plan. The plan includes providing loans to member states to buy military equipment and, more importantly, a commitment to trigger the European Union (EU)’s national escape clause.

This would prevent military expenditure from being counted in the bloc’s punishment mechanism for countries breaching EU spending limits. So, while Trump is trying to Make America Great Again, it’s also time to Make Europe’s Guns Again. Hardly a reassuring thought but one that has boosted the equity market and pushed down European bond prices.

There are immense challenges around increasing defence spending at a time when European countries have very stretched public finances. France’s government fell last year after struggling to pass tax increases to try and restore its fiscal poise. Aerospace and defence companies can be challenging investments as they are inherently unpredictable, have complicated accounting, and rely on government orders.

Following the recent rally, European defence stock valuations appear generous and are vulnerable to headline risk, so we’re not inclined to chase this rally. However, stepping back, increased European defence and infrastructure spending may have longer-term benefits for European indices beyond the defence sector, so we’ve raised our allocation to European equities.

We also cut our gold weighting slightly, remaining overweight. The conditions supporting gold remain broadly in place. It could be sensitive to a further rise in bond yields, but recently, gold has been relatively resilient in the face of yield movements. Instead, it seems to be driven more by being bought by central banks seeking to reduce their dependence on U.S. dollars.

There’s little indication of that trend changing, but in recognition of the extremely strong performance from gold, we thought it was prudent to take some profits.

What’s coming in the week ahead

This week, the economic landscape will be filled with key events that will likely shape market expectations and investor sentiment. We’ll see the release of several significant economic indicators, including China’s inflation rate, Germany’s balance of trade, and the U.S. Job Openings and Labor Turnover Survey, inflation rate, and producer price index.

These data points will provide valuable insights into the current state of the global economy and will likely influence monetary policy decisions and market trends. The Bank of Canada’s interest rate decision and the UK’s GDP growth rate will also be closely watched. In terms of corporate earnings, this week will see reports from several major companies, including Oracle, Ferguson, Adobe and Inditex.

Investors will be watching these reports closely for signs of growth and guidance, although for some companies, the tariff confusion will complicate this. If recent weeks are anything to go by, scheduled releases from companies and statisticians will be overshadowed by the latest erratic action from President Trump.

Another week passed and U.S. President Donald Trump was his usual vocal self, but did also signal some decisive action. President Trump sewed some confusion when he said on his app, Truth Social, that trade tariffs on Canada and Mexico would come into effect in April.

It seems likely he was referring to his planned reciprocal tariffs, which are due to be decided in April following investigations. 25% tariffs on Canada and Mexico were imposed today (4 March).

This is due to President Trump stating he wasn’t happy with the efforts made to reduce the inward flow of the addictive substance fentanyl through America’s neighbours. Of course, that could change. However, it’s hard to see how Canada can significantly reduce its share of fentanyl flow into America, it’s estimated that far less than 1% comes in via the northern border.

While tariffs had been threatened against Canada and Mexico, Chinese tariffs were already imposed in February over fentanyl flowing into the U.S. from China. So, it was a shock when President Trump announced that he would increase those Chinese tariffs by an additional 10%. China tends to respond with its own counter measures when tariffs become effective (a wise move given the U.S. president’s tendency to withdraw them at the last minute).

On this occasion, with the Chinese economy still struggling, there’s speculation that this latest challenge could prompt explicit measures to boost economic activity, such as fiscal stimulus or even a currency depreciation. China has recently seen its consumer prices start to pick up, but inflation remains disconcertingly low.

For that reason, China wouldn’t need to worry about the inflationary impact of a currency depreciation. President Trump also discussed potentially selling gold cards to wealthy prospective immigrants. For the sum of $5million (paid to the U.S. Treasury), these would grant the benefits of a green card.

Will Germany loosen its brakes?

The German election results were announced last week. The Christian Democratic Union (CDU) emerged as the largest party, with the previous leaders, the Social Democratic Party (SPD), slipping to third place.

While the results were largely in line with polling predictions, the victory gave the CDU (and its usual electoral partners the Christian Social Union [CSU]) and SPD enough votes to form a governing coalition with a narrow majority of 13 seats. Even if that group worked together with the Greens to relax the debt brake that limits Germany’s ability to borrow, they would fall marginally short of the 66% majority required to achieve the constitutional change.

The importance of this is a matter of debate, because the CDU and Greens would both like to borrow more money, but they would always struggle to agree what it should be spent on. The CDU favours defence, whereas the Greens place more importance on infrastructure.

With constitutional reform seemingly off the table, there are ways to increase spending a little by using loopholes or by declaring an emergency. The looming threat of an antagonistic Russia and/or the weakening of America’s commitment to NATO (without further spending from European peers) under President Trump seem reasonable arguments for an emergency.

Chancellor-elect Friedrich Merz spent the week trying to negotiate for greater defence spending. This was met by howls of protest from other party heads over what they suggested were double standards; Merz has previously held former Chancellor Olaf Scholz to account over borrowing plans and now wants to raise borrowing himself once elections have been concluded.

Nvidia shares its company results

One of the most significant events last week was Nvidia’s earnings results. It’s late in the earnings season but Nvidia’s results have become an important market gauge for the strength of demand for artificial intelligence and its associated infrastructure.

The results were strong, with revenue growth of 78% year-on-year, which was technically well above expectations. The company’s guidance for the next quarter was also positive, with expected revenue growth of 6% to 8%, which was good, but it didn’t inspire the market. 74% of companies have beaten earnings estimates this year, so sometimes just beating estimates isn’t enough, instead, they must far exceed expectations.

Berkshire Hathaway’s recent results showed strong performance, with operating earnings up 45% for the quarter and 25% for the year. The company’s cash position has increased, and while there were no share buybacks, the valuation isn’t seen as particularly demanding. Warren Buffett’s unwillingness to buy back either his own shares or to make further investments in the market provides an indication that valuations aren’t currently wildly attractive.

Looking ahead

This week, investors will be bracing themselves for a slew of economic events that could significantly impact the markets. Key releases, including manufacturing and services purchasing managers indices (PMI) data, inflation rates, gross domestic product (GDP) growth, and employment numbers from major economies are all set to feature.

Chinese indices, the NBS Manufacturing PMI and the Caixin Manufacturing PMI will provide insights into the country’s manufacturing sector, with expectations of a modest recovery. In the U.S., the Institute for Supply Management (ISM) Manufacturing PMI is expected to show a decline in manufacturing activity, while Japan’s Consumer Confidence Index may indicate a slight improvement in consumer sentiment.

In addition to these economic events, several major companies are scheduled to report their earnings this week, including Broadcom Inc, Ashtead Group, Admiral Group, and Costco Wholesale Corporation.

These reports will provide valuable insights into the performance of these companies and their respective industries. Investors will be watching these releases closely for signs of strength or weakness in economic recovery, which could impact market sentiment and direction.