Global equities retreated last week 1.1% in both local currency and sterling terms. The US led the declines, falling 1.7% on Friday and 2.1% over the week in sterling terms. The UK and Europe were also down around 0.5% over the week in contrast to emerging markets which saw a gain of 1.8%. Bonds were mixed, with US Treasury yields down a little but UK gilt yields up a bit.
The headlines were full of the geopolitical ructions between the US and Europe/Ukraine and the cosying up of the US and Russia. The German elections were also a big focus and the results here herald a major change in the political landscape with the far right AFD gaining a record 20% or so of the vote.
However, the results were pretty much as expected and the German market is up a little this morning. Crucially, the right-leaning CDU/CSU should be able to form a two-party coalition with the outgoing left-leaning SDP, without the need to form a messier and more unstable coalition with any of the smaller parties.
As far as the markets are concerned, the major implication is that Germany appears determined to boost defence spending significantly, now it is becoming clear that Europe will have to stand on its own two feet in this respect. The issue here is that there is a constitutional debt brake in Germany which limits structural government borrowing in most circumstances to 0.35% of GDP and requires a two-thirds majority in parliament to be overturned.
This will limit the speed and magnitude of any change but the direction of travel now seems clear not only in Germany but in much of the rest of Europe as well. The prospect therefore is for rather more fiscal stimulus down the road, which should supplement interest rate cuts by the ECB and provide a much-needed boost to European growth.
Returning to the here and now, the weakness in US equities was triggered by an outbreak of concerns that, far from picking up speed if anything, US growth could actually be slowing significantly. The worries were triggered by a string of weak numbers – namely larger than expected declines in housing starts and retail sales in January and in business and consumer confidence in February.
Walmart added to the angst, warning of a slowdown in growth over the coming year. Finally, Musk was back in the headlines with his weekend email requiring government employees to justify their work over the past week or lose their job. The fear here is that his DOGE (Department of Government Efficiency) could indirectly lead to lay-offs of as much as a million.
We have been here before. Last summer saw US recession scares flare up temporarily, triggering a short-lived correction of close to 10% in equities. Certainly, recent developments highlight that the Trump Presidency is not heralding a return to the sunny economic uplands that markets had seemed to believe immediately following his victory. But most likely, we are just looking at a slowdown in US growth to a 2% pace from 2.5-3% over the past year.
Here in the UK, the January retail sales numbers provided a pleasant surprise, posting a larger than expected gain and their first rise since August. The inflation data, however, were rather less welcome. The headline rate increased more than expected in January to 3.0% from 2.5% and the core rate rose to 3.7% from 3.2%.
The latest labour market numbers also showed underlying wage growth rising to 5.9% from 5.6%. The good news was that employment, which had been on a declining trend recently, appears to have stabilised. Altogether, this crop of numbers means the BOE looks all the more certain to remain cautious in cutting rates with the next reduction having to wait until May.
Across the world, Chinese equities continued their recent strong run with a further 3.5% rise last week. The latest gain was fuelled by President Xi’s meeting with leading entrepreneurs, including Alibaba’s founder Jack Ma who has been out of favour for a while. This rapprochement reinforced the revival in confidence in the Chinese tech sector prompted by the DeepSeek news a few weeks ago.
This coming week, geo-politics will once again fill the headlines with Macron and Starmer off to the US. But as far as the markets are concerned, at least as important will be Nvidia’s results on Wednesday. On the macro front, it is a quiet week with the only release of note being the Fed’s favoured inflation measure on Friday.
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