Key Highlights:
US Real GDP growth reached 3.2%, exceeding global peers, prompting the Federal Reserve to keep interest rates on hold as inflation remains relatively subdued but sticky.
Trump’s second term is expected to be more structured, prioritising US economic dominance through trade policies, tariffs, and technological advancements.
The $500 billion ‘Stargate’ AI initiative aims to advance US artificial intelligence capabilities, while China’s DeepSeek AI launch temporarily unsettled technology markets.
The US dollar has been gyrating during January, as we suggested it might, and remains closely correlated to the imposition of trade tariffs.
The US Q4 earnings season has kicked off positively so far, with around 75% of announcements ahead of forecast.
US Treasury must refinance $10 trillion in debt in 2025, with market participants closely monitoring the newly appointed Secretary to the Treasury, Scott Bessent.
Europe continues to struggle economically, yet the German’s benchmark index (DAX) reached record highs. A resolution in Ukraine could provide a boost to markets.
UK government borrowing increased to £17.8 billion in December, exceeding forecasts, while the FTSE 100 performed strongly despite fiscal concerns.
China remains reliant on exporting cheap manufactured goods and has ramped up exports to Asian markets.
The Bank of Japan is cautiously raising rates to balance inflation control while managing its high national debt.
Gold reached record highs, copper prices gained momentum, and oil markets remain stable.
The Investment Team maintains a cautious stance with high cash reserves and short-duration fixed income in response to market uncertainty, monitoring US debt strategy and global policy shifts.
What a busy start to the year! As expected, equity market volatility spiked higher as if to welcome the inbound 47th President of the United States, Donald Trump. Buckle up for a fascinating journey, and one we expect to be broadly business friendly, and therefore broadly market friendly. Volatility will return to keep us all on our toes and we feel investors are likely to notice the difference. Let’s lift the lid and look inside the February Investment Update.
American real GDP printed at an annualised 3.2%, stronger than last month and this no doubt provoked the Federal Reserve to leave interest rates on hold, for now. The US economy is in rude health compared to its global peers. Jobs data has picked up too, so has the somewhat “laggy” manufacturing economic performance (measured by the manufacturing Purchasing Managers’ Report) which showed the first signs of positive life in a long while during January.
Source : Federal Reserve
We expect the Trump 2.0 presidency to be more coordinated than the often random first term in office. Machiavelli said, "as a leader it’s better to be feared than loved". President Trump should be taken seriously but not literally, in our opinion. His book, The Art of the Deal points to his modus operandi which seemingly remains unchanged over decades. The primus inter pares, or top dog hegemony status for America, will be priority one over the next 4 years. Can US exceptionalism last indefinitely?
A sweeping announcement added $500 billion private funding in support of America’s technology ambitions in artificial intelligence. The project named Stargate has a goal to create infrastructure for powerful AI systems, potentially leading to significant economic and scientific advancements. Set against this backdrop the timing of China’s entrance onto the AI stage with DeepSeek appears cynical. Technology stocks tumbled in response to the arrival of China’s low cost ChatGPT competitor but made a comeback in following days.
Will “Trump’s tariffs” bring firmer inflation, or will they collect revenue for America and prevent deflation entering the economy as has been suggested? We wait to see and will no doubt be discussing this topic more in the months ahead. The opening salvo with Canada, Mexico and China would certainly suggest slower growth and perhaps higher inflationary pressures to contend with. For now, inflation remains relatively subdued but sticky, with the Federal Reserve’s preferred measure of Core PCE remaining at 2.8% in December and interest rates remain on hold.
The dollar gyrated during January as we suggested it might, however, the imposition of tariffs on near neighbours, Canada and Mexico saw the Dollar Index revert higher, back up to 108 and nudging 110 as we write this update. There is no doubt a weaker dollar will help markets beyond American shores but for now, the imposition of tariffs seems to correlate with a firm dollar.
America has c$10 trillion of debt to be refinanced during 2025. The newly appointed Secretary to the Treasury, Mr Scott Bessent, has yet to announce how this will be funded. We suspect with more short-dated Treasury Bills, but as yet we do not know. The impact to bond markets and ongoing liquidity is important. The US 10-year Treasury ended the month yielding 4.56%.
It’s easy to be downbeat on Europe – economic performance has disappointed, and the backbone markets of Germany and France look peaky indeed. Unusually perhaps Spain tops the EU economic leader board. We have discussed here before the manufacturing woes and the lack of energy security (particularly in Germany). Despite these facts, stock markets have held-up well with the German DAX hitting an all-time high. Stocks such as Siemens Energy, listed in Germany have performed astonishingly well, even outpacing Nvidia. A settlement in Ukraine will bring obvious overdue relief to human suffering and an additional peace dividend could well be felt in stock markets. We remain cautiously optimistic. Meanwhile there is scope for further reductions in interest rates which does seem overdue and surely must follow as German inflation fell to 2.3% during the month. The chart shows a decoupling between economic growth and stock market performance.
Source : Bloomberg Finance LP, Deutsche Bank of research
The UK's fiscal position remained under significant strain as borrowing rose to £17.8 billion in December, marking the highest level for the month in four years. The total deficit for the fiscal year stands at £129.9 billion, exceeding the Office for Budget Responsibility’s (OBR) forecast, with surging debt costs compounding fiscal pressures. This raised concerns over a potential breach of fiscal rules when reviewed in March. Chancellor of the Exchequer Rachel Reeves is maintaining a focus on growth, defending her tax policies as essential for stability. Mrs Reeves has signalled readiness to announce new fiscal measures in March if needed, emphasising careful monitoring of bond market moves. Meanwhile, trade optimism grows as the UK seeks sector-specific carve-outs in potential US trade negotiations, avoiding panic despite fiscal and trade challenges.
The UK equity market faced headwinds as fiscal concerns, and a weak macroeconomic environment dampen rally prospects. Despite strong trading updates from major retailers, rising payroll costs and subdued consumer sentiment weigh on outlooks. Industry analysts project FTSE 100 earnings growth of 6% for 2025, trailing the broader European market's 8%. UK equities delivered a strong January performance. The UK bond market remained volatile, with 10-year Gilt yields hitting 4.70% and 30-year yields peaking at 5.45% before retreating on softer data.
China’s position remains broadly unchanged – dealing with strategic difficulties of colossal national debt and a shrinking population. The need to export cheap manufactured goods remains acute and likewise remains a broadly successful approach. Tariffs will become a hurdle for the vast US economy where China enjoys a $2 trillion surplus today. A ramping up of exports to other markets, notably those in Asia has been notable. Chinese equities have drifted sideways since October 2024, interest rates have been cut to 3.1% and the Yuan is losing value in what could be a planned approach to managing tariffs. A deal with President Trump beckons and we note again the arrival on the global stage of China’s artificial intelligence capability.
We expect the Bank of Japan (BOJ) to adopt a more cautious approach, gradually raising its policy rate which will please markets as inflation comes under control. However, the likelihood of a stronger currency will be less favourable for exporters. The economic trilemma facing Japan, covered here last month, remains in play. Higher interest rates make for tougher debt servicing costs, and with a debt/GDP ratio of 264% care must be taken.
We should make note of firmer commodity prices around the world with gold making new all-time highs and leading indicator for economic growth “Dr copper” showing signs of upwards momentum. President Trump’s “drill baby drill” statement for oil has yet to drive prices notably lower. We note fracked oil becomes highly profitable around $100 a barrel and until then we expect a subdued response from America, although a deal with Saudi Arabia (like in 2017) should not be discounted. Natural gas demand is expected to increase further in 2025, primarily supported by fast-growing Asian markets. At the same time, the global gas balance remains fragile, with the supply side remaining tight and geopolitical tensions continuing to fuel price volatility.
At portfolio level we have kept our powder dry, notably awaiting a signal from the US Secretary to the Treasury about debt funding policy. We note the potential impact of tariffs could be to slow economic growth and to generate an uptick in short term inflation. The jury is out, and we will respond when greater clarity emerges. In the meantime, GDP growth in America remains robust while earnings are continuing to demonstrate steady if not startling positive performance. The job market has improved, and lower interest rates lie ahead. As volatility has returned (as forecast) we are relaxed with a higher cash weighting and our short duration fixed income positioning.
Overall portfolio performance remains in good shape relative to peers and volatility remains firmly in line with expectations.
We look forward to updating you again next month. Thank you for your ongoing support.
Written by the Alpha Beta Investment Team.
All sources Bloomberg unless otherwise stated.