- ‘Unsettled’ seems like an apt choice of word to describe 2025. Unsettled markets were duly unsettled by unsettling policy from a US administration determined to confront perceived wrongdoings by unsettling the global trade system through tariffs.
- If implemented, US policy could serve to keep inflation at a higher level and therefore make the US Federal Reserve more cautious in its approach. The focus on ‘government efficiency’ and tariffs are likely to reduce the appetite from US consumers as price pressures rise in the supply chain. ‘Government efficiency’, sounds awfully like another word for austerity – a policy that was not positive for growth here in the UK. Taken together, these are both potential headwinds and raise the threat of slower US growth ahead.
- In the UK & Europe, increased defence spending is the order of the day. Germany has approved large-scale uplifts in both its defence and infrastructure spend; likewise, the European Commission has sought to unlock extra defence spending for member states. At the National People’s Congress in China, plans were set out to loosen monetary policy and implement reforms to boost domestic consumer spending. Neither is likely to offset the impact of tariff increases in the near term.
- It is not unreasonable to assume a less optimistic outlook for both US growth and inflation. A recession looks unlikely if the jobs market holds, but slowing growth and higher inflation aren’t comfortable bedfellows for the Federal Reserve to strongly cut rates from here. The Bank of England seems set to continue quarterly rate cuts, whilst the ECB is still in a cutting cycle. However, if stimulus packages are implemented effectively, then the number of cuts may be lower than anticipated just a few weeks ago. In Japan, gradual rate rises look likely.
- Fixed income yields remain attractive, but with less certainty in the number of interest rate cuts ahead the near-term outlook for returns in the asset class will be focused on yield, rather than capital growth. In portfolios, we continue to hold a mix of high-quality investment grade corporate credit, flexible strategic bond funds and government bond trackers.
- The never-ending path upward in US equity markets is looking more challenged as it fell under a barrage of White House tariff pronouncements. This uncertainty served up an excuse for areas of the market that looked relatively expensive to sell-off, namely mega-cap tech. There remain areas of the equity market that look attractive from a valuation perspective, such as the UK, Japan, infrastructure and emerging markets. Diversification remains key.
- In currency markets, sterling strengthened against the US dollar, but lost ground versus the euro and the Japanese yen.
- Gold is shining brightly, surpassing $3100/oz for the first time. The threat of tariffs has caused market dislocations, with US banks moving gold from London to New York. Gold prices are also being supported by investor demand as geopolitical risks rise. The outlook looks solid.
- Brent Crude prices were volatile but broadly started and ended the quarter c$74/barrel. Oil prices are likely to remain under pressure from a forecast surplus level of supply, questionable commitments to adhere to OPEC quotas, a weak outlook for economic growth and a US administration keen to bring down energy costs.
Menu
