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Markets and macro insights with Bernard Swords, Chief Investment Officer
How did equity markets react to tariff announcements?
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Equity markets had a rocky start last week after US President Trump announced that tariffs would be imposed on Canada, Mexico, and China. Sentiment improved when the tariffs on Canada and Mexico were paused pending negotiations. Market analysts concluded that extreme measures, such as tariffs, are being used as a negotiating tool by the US administration. As of now, it is unclear which tariffs will be imposed; however, the pause allowed world equities to increase another 0.6% in euro terms, due to a weak euro. In local currency terms, world equities were flat.
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AI (Artificial Intelligence) companies reported that they had previously been aware of Chinese firm DeepSeek’s stated innovations and did not alter their capital spending plans. This aided a strong sector recovery in Information Technology (IT). The short-term test showed that leading AI firms are well anchored.
What were the key reporting takeaways last week?
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We are now halfway through the fourth quarter earnings season in the US, and one-third of the way in Europe. For companies that have reported so far, US earnings are up 12%, which is 5% higher than expected. This is in line with an average reporting season. Among the companies which provide guidance on future earnings, 30% have increased estimations and 15% have predicated decrease, which is slightly better than average overall. Europe is set to see earnings growth again. Companies who have reported in the euro area have delivered a 1% profit growth, 3% higher than forecast. Currently, the reporting season is revealing a more stable and solid earnings story.
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In less positive news, the euro area inflation report showed the core rate of inflation remaining constant at 2.7% year-on-year, due to a slightly higher-than-expected level of goods inflation. Services inflation showed a further decline to 3.9% year-on-year but it is still high enough to discourage any hopes of an imminent rate cut by the European Central Bank (ECB).
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January business sentiment indices in the US were mixed. The services index dropped to 52.8 against a forecast of 54. This was driven by a large drop in the orders index, which is the best indicator of future demand. Although the figure is not strong, is still above the level that indicates expansion. Given recent volatility, it may bounce back next month.
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Data from the manufacturing industry was more positive, with the manufacturing index jumping almost 2 points to 50.9. This is the highest level for nearly two and a half years and a return to expansion territory. All sections of the report showed improvement and good news for inflation, with prices paid indices decreasing in both the manufacturing and non-manufacturing indices.
Did the Bank of England reduce rates?
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As expected, the Bank of England reduced interest rates by 25 bps. The monetary policy committee voted 7-2 in favour of the reduction, with two members voting for a 50 bps cut, indicating that the Bank is leaning in a more ‘dovish’ direction than expected in a bid to promote investment and growth. Simultaneously, the Bank increased its inflation forecast. This could lead to a drop in confidence regarding ‘inflation credentials’ and may put pressure on sterling.
The week ahead: what to watch out for
From the US, important indicators on inflation, namely the Consumer Price Index (CPI) and the Producer Price Index (PPI). The Retail Sales Industrial Production reports will signal the growth momentum of the US economy. Industrial Production figures will be the key data release from the euro area.
