Markets in a Minute – Jan 2025: Navigating Trumponomics and Market Volatility
‘Trumponomics’ was the main focal point in January, as Donald Trump was inaugurated as US President for a second time. Trade tariffs – a government-imposed additional tax on imports or exports of goods and services – became a key theme over the month, as Trump threatened their use on a number of countries. Investors look forward to understanding whether the President’s bark is worse than his bite. The US Federal Reserve (Fed) left interest rates unchanged at its January meeting, citing persistent inflation above the 2% target. However, core consumer price index (CPI) inflation unexpectedly fell to an annual rate of 3.2% in December, down from November’s 3.3%, which was greeted positively. In the UK, CPI inflation edged down from 2.6% to 2.5% over the same period, which boosted hopes for a Bank of England interest rate cut in February.
Budget Deficit Concerns Spark UK Government Bond Market Volatility
- HM Treasury had to calm markets early in the month, after a sharp sell-off in the UK government bond (Gilt) market also saw pound sterling weaken. The Treasury reaffirmed its commitment to meeting fiscal rules as the average 10-year Gilt yield spiked to 4.8%, a level not reached since August 2008.
- Public sector net borrowing was reported at £17.8bn in December 2024, £10.1bn higher than a year earlier. The increase was attributed both to bigger day-to-day spending, with the current budget deficit £7.3bn higher than December 2023, and a large increase in investment from a one-off £1.7bn repurchase of military homes. The announcement sparked concerns that 2024-2025 borrowing could overshoot the Office for Budget Responsibility’s forecast by some way, leading to concerns that higher debt interest payments would put too much pressure on the new governments’ plans.
- Inflation as measured by the Consumer Prices Index (CPI) increased at an annual rate of 2.5% in December, down from 2.6% in November, according to the Office for National Statistics (ONS). Economists had expected inflation to stay steady at 2.6% and the new was welcomed by investors hoping for an interest rate cut from the Bank of England in February.
- Core CPI inflation – which excludes volatile food and energy components – fell to 3.2% from 3.5%, a bigger drop than the expected 3.4%.
AI risks on show and Trump makes his mark on the global stage
- Nvidia lost approximately $590bn from its market value after Chinese start-up DeepSeek announced an artificial intelligence (AI) competitor that fuelled investor concerns over its future dominance in the AI space. This sell-off eclipsed the previous record, a 9% drop in September 2024 that wiped out $279bn in value. It was the biggest single-day fall in US stock market history, according to Bloomberg News.
- US President Donald Trump announced plans to use trade tariffs, with Canada and Mexico facing a 25% levy, and 10% on China. All three countries said they would retaliate in kind if Trump’s tariffs went ahead.
- Trump also threatened to widen the scope of his trade tariffs, repeating his warning that the European Union (and the UK) would face levies. Trump also conceded Americans could bear some of the economic impact from a nascent global trade war. Stocks plunged across Europe and the UK as the dollar surged over further tariff fears.
- Canada’s currency felt the most pain, with the CAD falling to 1.45 per USD, its lowest level since 2003, amid the surge in demand for the strengthening US dollar.
Ongoing pain for the Chinese economy
- China continued to battle inflationary challenges as CPI inflation increased 0.1% in December from a year earlier, in line with estimates and down from 0.2% in November, due to lower food and fuel prices. Core CPI inflation increased from 0.3% in November to 0.4%.
- Chinese producer price index (PPI) inflation declined 2.3% year on year, slowing from the prior month’s 2.5% drop and extending the deflation in factory gate prices for the 27th consecutive month.
- In a more positive move for the economy, the People’s Bank of China announced it would implement a moderately loose monetary policy this year to support economic growth, as well as reducing the reserve requirement ratio and interest rates to boost consumption. This should give overseas investors confidence that economic conditions will improve, making China more attractive.
In summary
Despite the political noise, it was a positive month for most investment markets. Even the US mega-cap sell-off prompted by the arrival of DeepSeek did not derail returns. Although the US market was one of the laggards on a regional basis, it still provided strong returns. Perhaps surprising given the economic woes of Europe, European equities were among the strongest performers and rhetoric from the European Central Bank hinting at further rate cuts likely helped. UK equities also performed well, although this performance was concentrated in larger companies, with medium and small cap companies not experiencing the same positive sentiment.
January was a positive month for bond markets, with positive returns across the asset class. US Treasuries continued to act as a safe haven for investments, offering modest and stable returns. Gilts suffered a rollercoaster ride at the start of January, as concerns over increased government borrowing – potentially to support fiscal spending in a challenging economic environment – grew. Fears dissipated somewhat toward the end of the month and the asset class finished the month positively.