Trump’s tariff uncertainty, Europe’s defence integration, and the BOE’s economic forecasts

Welcome to this week’s Market Pulse, your 5-minute update on key market news and events, with takeaways and insights from the Sidekick Investment Team.

Today, we’re looking at Trump’s tariff troubles, Europe’s defence integration, and the BOE’s economic forecasts.

But first, our number of the week…

$2,888

That was the price of gold on Wednesday morning, a record high. Demand for the safe-haven asset has spiked amidst trade tensions, equity turbulence, and economic uncertainty.?

Sidekick Takeaway: While this price tells us something about investor attitudes right now, the metal’s surge also appears to be driven by technical factors. Traders are rushing to bring gold back to the US before tariffs hit, resulting in a supply squeeze.

Only have a minute to read? Here’s the TL;DR:

• Trump abruptly paused tariffs on Mexico and Canada just days after announcing them, with levies on the UK and EU potentially looming. Unfortunately, this ‘Trumpian uncertainty’ is likely to be a hallmark of the next four years.
• European leaders called for increased defence integration across the continent and reduced security dependence on America. This new ‘coalition of the willing’ could create opportunities for investors in European defence stocks.?
• The BOE’s latest forecasts show sluggish economic growth and stubborn inflation, dealing a blow to Chancellor Reeves’ fiscal plans. Due to the BOE’s convention of relying on market rate expectations, however, this forecast may overstate growth risks.

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Notices

It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.

1) Madman Theory: Trump’s Tariff Troubles

On Saturday, US President Donald Trump unveiled the first round of tariffs on America’s trading partners. While tariffs were widely anticipated following Trump’s election, this initial plan was bizarre and unusual.?

Strategic competitors like China were assigned a levy of just 10%, while neighbors Canada and Mexico were slapped with 25% tariffs.?

Even more strange, however, was Trump’s last-minute policy reversal. Despite limited new concessions, Trump paused tariffs on Canada and Mexico just before they went into effect (tariffs on China will remain).?

Unfortunately, this episode is indicative of the persistent Trumpian uncertainty investors will face over the next four years.

Trumpian uncertainty will make planning more difficult

Given his track record of whiplash policymaking, investors and companies never know which of Trump’s plans are serious proposals and which will be reversed in a week.?

This uncertainty is already having real, measurable effects in the data:

• A widely followed index of trade policy uncertainty recently hit its highest level on record.
• Estimates of the term premium, reflecting future uncertainty about US interest rates, have steadily risen.
• The VIX, commonly known as Wall Street’s ‘fear gauge,’ has seen frequent spikes in response to Trump news.?

In the long run, this trend is likely to lead to more sluggish economic growth.

Trumpian uncertainty won’t tip America into recession on its own. However, investors and businesses are more hesitant to commit capital to large projects if they can’t plan for the future.

What comes next for the EU & UK?

Following his initial tariff announcement, Trump made additional comments regarding trade levies on the EU and the UK:

• While tariffs on the EU will ‘definitely happen’ according to Trump…
• … he thought that trade issues with the UK ‘could be worked out.’
• Despite Starmer’s efforts to renew the UK’s relationship with the EU, the ability to independently negotiate trade agreements could be a Brexit benefit.

Given this week’s tariff back-and-forth, however, nobody knows for sure how seriously to take such comments. While EU policymakers are preparing for the worst, ‘definitely’ isn’t definite when it comes to Trump.

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2) Combined Arms: A New European Defence Coalition

European leaders are making renewed calls for a more integrated defence approach across the continent, no doubt in partial response to Trump’s antics this week.?

Today, Europe remains uncomfortably dependent on America for its security posture:

• 23 of 27 EU states are in NATO, which has a joint mutual defence policy.?
• The US contributes around 16% of NATO’s budget, in line with Germany.
• However, the US accounts for about two-thirds of all defence spending within the alliance.

Not only has Trump sharply criticised NATO in the past, but he has encouraged adversaries to attack allies who fail to meet their financial obligations.?

This week, European policymakers floated assembling a new ‘coalition of the willing’ to enhance the continent’s security outside of NATO. In addition to EU members, such a coalition would likely include Norway and the UK.?

What is the status of Europe’s defence industry?

These plans could accelerate Europe’s current trend toward increased military spending and domestic defence investment.

In response to Russia’s invasion of Ukraine, defence spending amongst European NATO members has jumped, with 23 member countries now meeting the 2% spending guideline.?

All this has been great news for European defence stocks. Over the past year, an index of European aerospace and defence companies has climbed 37%.?

While overall growth in Europe is expected to be slow-going this year, these political forces are likely to drive increasing opportunities and expansion in the continent’s defence sector.

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3) Stormy Weather: BOE Forecasts Slow Growth

The Bank of England dealt a blow to Chancellor Reeves this week with disappointing UK growth forecasts. GDP is now expected to expand just 0.75% this year, down half from previous estimates.

Reeves recently unveiled new budget measures designed to kickstart the UK economy. The BOE’s forecasts, however, show that this new spending may not be enough to put the UK on a higher growth path.

While the BOE’s decision to cut rates by a quarter point should help provide additional economic support, the forecasts show a Labour government stuck between slow growth and self-imposed fiscal constraints.

Do the BOE forecasts overstate weakness?

There are reasons to think that the BOE’s latest expectations overstate the UK’s growth risks, however:

• The BOE has a longtime convention of using market expectations of rate cuts to build their economic forecasts.
• Currently, the market expects three rate cuts this year, in contrast to the four cuts suggested by Governer Andrew Bailey.?
• As a result, the BOE’s own forecasts may underestimate the level of economic support the BOE plans on providing.?

While the UK does face growth risks, the BOE’s forecasts could be somewhat misleading and unnecessarily punish Reeves.?

Both fiscal policy and monetary policy have a crucial part to play in supporting the UK economy. The BOE shouldn’t discount their own role – even if markets might.

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Notices

Please remember, investing should be viewed as longer term. Your capital is at risk — the value of investments can go up and down, and you may get back less than you put in.

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