Over the last week the top indices were dominated by European and UK equity markets plus China, all up in the region of 1.5-2%. Europe was buoyed by hopes for a benign tariff outcome with the US, China hopes for the same and is cheap, and the UK is good value and buyers are encouraged by the prospect of notable interest rate cuts. Today it was announced that UK growth fell last month, for the second month running.
UK and China are approximately 40% cheaper than the US, and they have been overlooked in recent years as the rest of the world bought into the idea of American exceptionalism… an idea which Trump has been single handedly unravelling, day after day, week after week (Quick aside. These numbers were correct at close of play yesterday, and today markets are unsure whether to take seriously Trump’s latest tariff tiff, this time with Canada. More below.)
The silence in markets of recent weeks is worrying a number of prominent analysts, with good reason. Trump tariffs have not yet blown up the world economy, with the result that many investors appear to believe that all is well. However, history informs us that the consequences should peak in 2026, according to research by the Danish central bank, amongst others.
Slowly but surely the consequences for the US should become clearer in higher inflation numbers and lower growth. In tandem the battle between Trump and the Federal Reserve will heat up. This conflict will unfold with some vigour in the months ahead. None of this is reflected in equity markets.
In recent weeks our expectation was that the UK equity indices would break new high ground. The FTSE 100 is at an all time high, and there has been a thrust up through resistance in the FTSE 250 and the FTSE Small Cap ex IT. Japan and China equities are also on the verge of breaking up through resistance.
Of course we mustn’t overlook that the major US indices are also in new high ground. But the similarity ends there. The “Fear And Greed” index for US equities is flashing “extreme greed”. In sharp contrast, the UK and China are cheap and have been overlooked by global investors for years.
There is a conundrum, one with which we have all become familiar in recent years. One frustrated UK fund manager protested that despite the extraordinary value which he uncovers meticulously scouring the UK stock market day after day, it can all come to nought with another ill-thought-through overnight tweet from Trump.
Our middling expectation/hope is that there will be a sugar rush from the Big Beautiful Bill, perhaps with a bit more Trump window dressing, allowing investors to avert their gaze from reality long enough for other global markets to keep trundling ahead for a while yet. How long is unknown, and how far is something we will address over the next few weeks. This uncertainty suggests that employing stop profits is prudent. As a guide, remember that in the long run annual returns from equities are nigh-on 10% with income reinvested. With this in mind, in theory if you make 10% in a month, you might sell and bank profits, and sit out the next 11 months in safety.
Over in the commodities universe, copper caught the headlines this week, up 9%, inspired by Trump’s latest bizarre move to put a 50% tariff on copper imports. Copper is a commodity for which there is mostly no alternative, so if you put up prices by 50% they have to be taken on the chin, what economists call inelastic demand. This extra cost is either accepted by companies and eats into their profits, or it is passed on to their consumers, cutting into their profits or income. In microcosm this is how all the tariffs work – a new tax on US companies and consumers, slowing economic growth and putting up inflation. AKA stagflation, a tough one for policymakers. If you act to reduce inflation you hit growth – if you work to boost growth, you spur inflation. This adds to the mix of corrosive uncertainty which investors in US equity have chosen to ignore… for now.
I hate that we have given Trump so much air time this week (and any week!). So I might as well go all in. Overnight new tariffs on Canada have been announced, and the letter published by Trump is here. What is your impression when you read it? Insane rambling? Or merely the illiterate struggle of someone who might have left school at 13? This man is at the helm. At the very least don your life jacket.