It’s hard to keep up. The Trump juggernaut is careering down the fast lane, with investors clinging on for the ride. Two weeks ago, the DeepSeek drama dominated the headlines; last week, it was broad-based tariffs on Mexico, China and Canada; this week, its tariffs again, but this time targeted levies on steel and aluminium.
The protectionist agenda
As it happens, it’s the same three countries in the cross hairs this week. Mexico, China and Canada are the three biggest exporters of steel to the US, contributing nearly half of a big deficit in this key building block of the modern globalised economy. In 2023, America imported US$82bn of steel, but exported only half as much. It’s an obvious target for tariffs.
As with all protectionist levies, the fear is that the new targeted tariffs will lead to higher input costs for American manufacturers and consumers. And, as with last week’s announcements, it is by no means clear whether the tariffs are for real, or a negotiating ploy. Investors are, sensibly, waiting for Trump’s actions rather than his words. There is often a gap between the two.
So far, investors have largely taken tariffs and the threat of trade war in their stride. The narrative remains that, while the President may be unpredictable, he is a pragmatist. He sees the financial markets as a gauge of his success, and he is unlikely to persist with any measures that the markets dislike.
Standing back
Despite the uncertainty, markets are holding up. The S&P 500 has lost momentum, but it is hovering above 6,000. Elsewhere, the FTSE 100 has benefited from the strength of the dollar, which boosts exporters and those companies whose sales are largely denominated in the US currency.
Sentiment is weaker than it was. Just 62% of US stocks are running ahead of their 200-day moving average. The equal-weighted benchmark, a guide to broader sentiment, is also below its recent peak. Only around half of its constituents are above their 50-day moving average.
But fundamentals look positive. Nearly two thirds into the fourth quarter earnings season, around three quarters of US stocks are beating profit expectations. The expected growth rate for the quarter is now well up from the start of earnings season. For the year as a whole, we expect the third year in four that earnings have grown.
Finding balance
An increasing challenge for investors, though, is working out how to maintain a diversified portfolio in a higher interest rate environment. When bond yields stand at today’s higher levels, shares and fixed income investments tend to track each other higher and lower. That reduces the incentive to own a mixture of both bonds and shares. It means that investors need to look further afield, into commodities and property, to gain that portfolio balance.
Gold has been one of the biggest beneficiaries of this trend. The precious metal last week hit a new record high of nearly US$2,900 an ounce. Demand for gold, from central banks as well as other more price sensitive investors, stands at high levels.
What to watch this week
Inflation and growth are both in the spotlight this week. In the US, Wednesday will see the latest Consumer Price Index inflation number, with a modest fall in the rate of price rises expected. That is unlikely to change the US Federal Reserve’s mind when it comes to interest rate cuts. It said last month that it was not inclined to cut rates further until the data suggested more easing was necessary.
