Wall Street recovers as trade tensions ease
Since our last Lowdown early last month, Trump has softened his aggressive approach to tariffs, announcing a 90-day pause in their reciprocal implementation on those countries that had not yet adopted retaliatory measures. The result is that market indices and stocks have recovered much of their losses.
Furthermore, US-China trade tensions have also eased: senior US and Chinese officials met in Geneva over the weekend, culminating in a White House announcement of a trade deal with Beijing. Prior to the meeting, Trump had been forthright, referencing a “total reset” in relations between the two superpowers. Preliminary talks, it seems, had been upbeat, and negotiations had been friendly and constructive.
Will this sudden turnaround lead to a better outcome and less anxiety over a slowdown in global economic growth? Absolutely. And it is just possible that the “Trump Put” might be back in play, which will mean further gains on Wall Street and elsewhere.
The US and UK agree first trade deal since reciprocal tariff announcements
It's still early days, but there is already more in the way of positive sentiment among investors. Indeed, the last four weeks or so have seen a significant rally across a number of indices, and Trump and Starmer have already announced a UK-US trade deal. Highlights include the UK lowering vehicle tariffs to 10%, and eliminating metals duties. The US, meanwhile, is reducing duties on British steel, aluminium and vehicles. The agreement, which admittedly has not been completely finalised, also includes a tariff-free quota for British beef, as well as plans for a digital trade deal.
Keir Starmer has hailed the deal as one that will save thousands of jobs. That said, a number of leading UK economists have suggested that any agreement with Trump is not worth the paper it is written on. Remember – he signed deals with Canada and Mexico during his first term in office, only to hit them with hiked tariffs days after he returned to the White House.
“Wait and see”, says the Fed, leaving interest rates unchanged
On the US macro front, the Federal Reserve Bank has left its target interest rate policy range unchanged at 4.25% - 4.50%. Chair Powell and the FOMC feel that this policy rate, which is modestly restrictive at the current time, will enable the Fed to adopt a “wait-and-see” approach to monetary policy.
This would seem a reasonable decision: the US economy has cooled, but levels of uncertainty remain high. And scepticism over possible tariffs has not yet impacted the hard data – such as GDP and employment. Trump himself might not support this approach – he has been extremely critical of Jerome Powell and the Fed's current rate policy.
In Powell's defence, though, cutting interest rates at a time when the US still has above-target inflation and when uncertainty over tariffs persists, could drive prices up – something the Fed definitely wants to avoid. It is putting it mildly to say that Powell and Trump do not see eye-to-eye. But the good news is that the US will most likely dodge a recession, and rates will be cut in the not-too-far-distant future. This will be welcomed by both the US Treasury and equity markets.
Never bet against America
We are long-term supporters of Wall Street, and have seen US equities outperform the rest of the world by more than 200% since 2010 – excellent news for global investors. Generally, this has meant that many portfolios have become increasingly overweight to US assets (intentionally or as a result of a lack of rebalancing) to capture the superior growth enjoyed by US tech companies. Either way, it was the right call, and the outcome has been rewarding.
But recent evidence has suggested that the tide is slowly turning in favour of a more diversified international approach. The underperformance of the US compared with the rest of the developed world this year is a reminder of the importance of diversified risk exposures.
The US dollar has weakened significantly in recent months as a result of several interrelated factors. This could signal a potential shift in its global standing and valuation. Trade tariffs, policy uncertainty, economic growth concerns, shifts in global capital flows and de-dollarisation trends all point to the US dollar being structurally overvalued.
So to mitigate a potentially overvalued US dollar, diversifying investments into international markets that are not denominated in dollars (such as Europe and Japan) makes sense. Diversification, by definition, might mean that you won’t have the highest return in a given year. But it will create a smoother investment outcome within a portfolio.
However, there is still a consensus view among asset managers, allocators, and financial institutions that the US will remain overweight over the next decade in respect of asset allocations, driven by strong economic fundamentals, technological innovation and leadership, and favourable policy environments. This is in spite of a number of risks and significant levels of volatility.
The Bank of England cuts its key policy interest rate
While the UK was successfully negotiating with the US on a trade deal, the Bank of England Monetary Policy Committee voted five-to-four in favour of cutting its key policy interest rate by a quarter of a percentage point to 4.25%. However, the tight vote split has prompted the market to price in reduced odds of a third rate cut this year, as two of the four dissenting members were in favour of keeping rates unchanged. Andrew Bailey emphasised that a “gradual and careful” approach to future adjustments remains appropriate.
Elsewhere in the UK, the housing market slowed last month: buyers are now faced with having to pay higher stamp duty. But many commentators believe that activity will pick up in the summer months as earnings rise and the Bank of England cuts interest rates further (that said, the odds of a third cut now seem slightly lower than before).
Germany sees a pick-up in industrial output
Although Germany’s industrial production jumped 3% sequentially in March – significantly exceeding consensus forecasts – the German economy has long been sluggish, and there are few signs of any kind of a reprieve on the horizon. Many believe that Germany needs to take more risks and boost its stagnant economy, particularly with a decade of investment in infrastructure predicted. Market watchers evidently believe that Germany’s future looks fairly bright, given that the DAX Stock Index has just hit an all-time high.
But a trade deal with Japan could take more time
While the US has a tariff framework agreement with the UK in place, it might be harder to secure a similar agreement with Japan. Tokyo is now urging Washington to review its series of tariff measures, seeking the full removal of reciprocal tariffs. This might be more difficult to achieve, but we are seeing more flexibility between government officials in their discussions.
Japan’s economy is finally showing some signs of improvement, emerging from a period of stagflation and deflation. However, concerns remain over the economic outlook: headwinds include tariff risks and their potential to delay the Bank of Japan’s monetary policy normalisation process.
Another “V shaped” recovery!
What has been interesting since “Liberation Day” on 2 April (and the subsequent declines on Wall Street) has been how US indices and stocks have posted solid gains since the S&P 500 Index bottomed out on 8 April. In fact, this index is now back to the level it was at prior to Trump’s tariff tantrums, and just 8% shy of its 52-week high. Furthermore, last Friday saw the S&P 500 notch up its first nine-day winning streak since November 2004. While the index has seen many seven- and eight-day winning streaks in recent years, nine-day consecutive runs have proven elusive over the past two decades.
The news of further easing in trade tensions between the two superpowers could improve investor sentiment, even leading to an extended rally in the stock markets. And news that Ukrainian President Volodymyr Zelensky is ready to meet Russian President Vladimir Putin “personally” in Istanbul on Thursday for talks over ending the war will doubtless add to positive sentiment. But there are still many challenges to address over the coming weeks and months.
In summary
While volatility and geopolitical risks persist, the fundamental and technical conditions support the continuation of the bull market on Wall Street and other international markets. Also, physical gold and Bitcoin are likely to stay investor-friendly: they both remain an alternative investment outside of the traditional bond and equity markets. But vigilance and prudent risk management remain vital in today's volatile and unpredictable world.
