A Look at Global Financial Markets 11.02.25
This Investment Strategy update aims to provide clients with a comprehensive picture of the global economy and regular updates on the current stock market and fixed-income trends, to assist investors in making informed investment decisions. It is headed by Tom Elliott, deVere's International Investment Strategist, who produces regular updates on a wide range of topical investment issues. Please find below the update from 11th February 2025.
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Market sentiment: Investors are apprehensive, and morbidly fascinated, by what is happening in Washington. But they are giving the new administration the benefit of the doubt.
A traditional U.S commitment to free trade is quickly giving way to nineteenth century mercantilism. Trade relations are to be defined by the extent to which a trading partner can bargain against the economic and military power exerted from Washington. This creating disquiet with in U.S boardrooms, as well as for America’s trading partners. The current cycle of quarterly U.S corporate earnings calls, by those engaged in manufacturing, reveal a great deal of unease over the outlook for their supply chains, their export sales, and their investment plans, in the event of a global trade war. Car, electronic appliance, and agricultural companies are particularly affected.
However, financial markets have reacted positively in recent weeks to the slower-than-expected pace of tariff announcements, and Trump’s willingness to delay imposing the 25% tariffs on Canada and Mexico that were announced ten days ago. (It is striking how trivial the concessions made by Mexico and Canada were, although Canada also threatened its own retaliatory tariffs). Perhaps Trump’s tariff threats are mostly negotiating ploys, as some have long suggested?
The 10yr Treasury yield, at 4.5%, is back to mid-December levels, even as the Fed held interest rates at it end of January meeting. A similar fall in gilt yields has also occurred, which demonstrates the pulling power that Treasuries have on other bond markets. Gold has reached new highs, reflecting is safe haven status. On stock markets, the relatively cheap and defensive FTSE 100 index has also reached new highs recently, with U.K stocks outperforming Wall Street so far this year.
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There is value in bonds, and non-U.S equities. Investors should remain diversified, holding a broad portfolio of equities, bonds, and alternatives such as gold, property, and structured products. Financial history shows that minimising portfolio risk, and so maximising risk-adjusted returns, is best achieved through asset diversification.
Real yields on Treasuries and gilts are positive. Many European and Asian stock markets offer value compared to Wall Street, and particularly to the Big Tech stocks, where investors should avoid drifting into ‘overweight’ positions because of the strong performance of the sector in recent years.
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Morbidly fascinating. Trump is opening many Pandoras boxes at once. It is hard not to be morbidly entranced, fascinated. Three examples:
Trade deficits. When Trump sees trade deficits, he only sees ‘unfair’ trade, and humiliation for America. He does not see the recycling of those trade surpluses by European and Asian countries, back into U.S Treasuries, that have helped keep U.S borrowing costs low, finance spending on wars of choice, fund tax cuts for the wealthy, and more generally fund record peace time budget deficits. If the U.S ran trade surpluses with all its trading partners, who would buy those Treasuries? Presumably Americans are already holding all that they want, and would only buy more if prices fell (and yields rose)?!
Trump is all-powerful. The Supreme Court was already ‘his’, thanks in part to appointments that he made to it in his first term of office. He has now assumed authority over Congress, the legislative branch. Rather chillingly, Elon Musk has made clear his intention to use his wealth to ensure the 2026 Congressional mid-term elections oust any non-compliant Republican members. Musk’s DOGE has already insinuated itself into several key parts of the executive, and is looking to disband USAID, all without authorisation from Congress.
Western allies. It is also clear Trump has little affection for the western alliance that America built up and has led since 1945. Biden recognised that western allies were needed to help challenge China on a range of issues. But Trump and Musk appear unconcerned about attacking allies of the U.S as much as they attack China. Indeed, they are doing more to encourage the nationalist far right in Europe, that paralysis E.U decision making in response to Russia, than China is. His penchant for bullying erstwhile friendly countries will not go unnoticed by Russia and China, potentially leading to a realignment of traditional trading, economic and political alliances.
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China’s ‘Sputnik moment’. Almost $1 trillion was knocked off U.S share prices a fortnight ago, when the Chinese company Deep Seek became the most popular app download on Apple. Its AI was built at a fraction of the cost of U.S competitors, leading to fears that the ‘moats’ that Meta, Google, Open AI and Anthropic have built around their intellectual property, may not be a wide and as impregnable as they, and investors, thought. There are allegation that Deep Seek illegally copied Open AI’s large language model (LLM), and that its claim to have used relatively un-sophisticated microchips may prove wrong. But the story has challenged the assumption that the U.S will continue to dominate AI, adding more uncertainty and volatility into the tech sector.
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Two adults in the room. Jay Powell at the Fed, and Scott Bessent at the Treasury, will have to manage the economy as best they can. If the text books are right, higher inflation and interest rates should follow tariffs and tax cuts. But inflation can be avoided, if companies manage to simultaneously expand supply. But given the still-tight labour market, a lot will be riding on such tech-derived efficiency gains. Note that the unemployment rate fell on Friday, from 4.1% to 4.0%.
Bessent says that he and Trump are united in one key goal: ‘he and I are focused on the 10yr Treasury yield…he is not calling for the Fed to lower rates’*. If this means the discipline of the bond market will be allowed to prevail, it suggests the inflationary impact of tariffs is being considered by Trump, and that unfunded tax cuts may be more smaller than feared. But these are big ‘if’s, given what we know of Trump’s fondness for both.
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Bank of England…forecasting stagflation? Last week the Bank of England cut interest rates by 25bp, to 4.5%, in response to weak growth. It now thinks the economy will grow just 0.75% this year, from a 1.5% estimate it made in November. Worryingly, it also forecasts a rise in inflation over the coming months, from 2.5% year-on-year in December to a peak of 3.7%, before slipping back to 2% in two year’s time.
The FTSE 100 rallied in response, in expectations that U.K rate cuts will lead to a weaker sterling, boosting the sterling value of overseas earnings.
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U.K property. The Halifax building society last week reported that residential property prices are at new highs. Supported by a rush of buying ahead of a reduction of the stamp duty threshold, and reflecting strong demand for new mortgages. Last week’s 25bp rate cut by the Bank of England, and the fall back in gilt yields in recent weeks, has lifted confidence. Meanwhile, supply is still limited. For all of the government’s plans to substantially increase housebuilding, housebuilders still report planning delays to be a significant obstacle to new building.
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Sterling trades at $1.24, and has traded in a narrow range of $1.22 to $1.25 so far this year. If the banks are right, and FX volatility is about to increase, sterling may well break out of that range. But not necessarily to weaken. Certainly, relative interest rates, and weaker economic growth, point to a decline in the value of sterling. But Trump wants a weaker dollar, and may demand a manipulation of exchange rates by other countries to achieve this. In 1985, the Plazza Accord led to a fall in the dollar against the deutschemark and the yen. But by the standards of international financial markets and FX flows, those were simpler days and currencies easier to manipulate.
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deVere's International Investment Strategist