Guy Foster, Chief Strategist, discusses the latest on U.S. trade tariffs. Plus, Janet Mui, Head of Market Analysis, analyses recent U.S. economic data and the impact of trade tariffs on consumer confidence.
Another week passed with geopolitics firmly at the top of investors’ minds. U.S. President Donald Trump was his usual vocal self, but did also signal some decisive action.
President Trump sewed some confusion when he said on his app, Truth Social, that trade tariffs on Canada and Mexico would come into effect in April. It seems likely he was actually referring to his planned reciprocal tariffs, which are due to be decided in April following investigations.
25% tariffs on Canada and Mexico were imposed today. This is due to President Trump stating he wasn’t happy with the efforts made to reduce the inward flow of the addictive substance fentanyl through America’s neighbours. Of course, that could change. However, it’s hard to see how Canada can significantly reduce its share
of fentanyl flow into America – it’s estimated that far less than 1% comes in via the northern border.
While tariffs had been threatened against Canada and Mexico, Chinese tariffs were already imposed in February over fentanyl flowing into the U.S. from China. So, it was a shock when President Trump announced that he would increase those Chinese tariffs by an additional 10%. China tends to respond with its own counter measures when tariffs become effective (a wise move given the U.S. president’s tendency to withdraw them at the last minute).
On this occasion, with the Chinese economy still struggling, there’s speculation that this latest challenge could prompt explicit measures to boost economic activity, such as fiscal stimulus or even a currency depreciation. China has recently seen its consumer prices start to pick up, but inflation remains disconcertingly low. For that reason, China wouldn’t need to worry about the inflationary impact of a currency depreciation.
President Trump also discussed potentially selling gold cards to wealthy prospective immigrants. For the sum of $5m (paid to the U.S. Treasury), these would grant the benefits of a green card.
Will Germany loosen its brakes?
The German election results were announced last week. The Christian Democratic Union (CDU) emerged as the largest party, with the previous leaders, the Social Democratic Party (SPD), slipping to third place.
While the results were largely in line with polling predictions, the victory gave the CDU (and its usual electoral partners the Christian Social Union [CSU]) and SPD enough votes to form a governing coalition with a narrow majority of 13 seats. Even if that group worked together with the Greens to relax the debt brake that limits Germany’s ability to borrow, they would fall marginally short of the 66% majority required to achieve the constitutional change.
The importance of this is a matter of debate, because the CDU and Greens would both like to borrow more money, but they would always struggle to agree what it should be spent on. The CDU favours defence, whereas the Greens place more importance on infrastructure.
With constitutional reform seemingly off the table, there are ways to increase spending a little by using loopholes or by declaring an emergency. The looming threat of an antagonistic Russia and/or the weakening of America’s commitment to NATO (without further spending from European peers) under President Trump
seem reasonable arguments for an emergency.
Chancellor-elect Friedrich Merz spent the week trying to negotiate for greater defence spending. This was met by howls of protest from other party heads over what they suggested were double standards; Merz has previously held former Chancellor Olaf Scholz to account over borrowing plans and now wants to raise borrowing
himself once elections have been concluded.
Nvidia shares its company results
One of the most significant events last week was Nvidia’s earnings results.
It’s late in the earnings season but Nvidia’s results have become an important market gauge for the strength of demand for artificial intelligence and its associated infrastructure. The results were strong, with revenue growth of 78% year-on-year, which was technically well above expectations.
The company’s guidance for the next quarter was also positive, with expected revenue growth of 6% to 8%, which was good, but it didn’t inspire the market. 74% of
companies have beaten earnings estimates this year, so sometimes just beating estimates isn’t enough – instead, they must far exceed expectations.
Berkshire Hathaway’s recent results showed strong performance, with operating earnings up 45% for the quarter and 25% for the year. The company’s cash position has increased, and while there were no share buybacks, the valuation isn’t seen as particularly demanding. Warren Buffett’s unwillingness to buy back either his own shares or to make further investments in the market provides an indication that valuations aren’t currently wildly attractive.
Looking ahead
This week, investors will be bracing themselves for a slew of economic events that could significantly impact the markets. Key releases, including manufacturing and services purchasing managers indices (PMI) data, inflation rates, gross domestic product (GDP) growth, and employment numbers from major economies are all set to feature.
Chinese indices, the NBS Manufacturing PMI and the Caixin Manufacturing PMI will provide insights into the country’s manufacturing sector, with expectations of
a modest recovery. In the U.S., the Institute for Supply Management (ISM) Manufacturing PMI is expected to show a decline in manufacturing activity, while Japan’s Consumer Confidence Index may indicate a slight improvement in consumer sentiment.
In addition to these economic events, several major companies are scheduled to report their earnings this week, including Broadcom Inc, Ashtead Group, Admiral Group, and Costco Wholesale Corporation. These reports will provide valuable insights into the performance of these companies and their respective industries.
Investors will be watching these releases closely for signs of strength or weakness in economic recovery, which could impact market sentiment and direction.
