Weekly Market Update - 13th November 2024

A US Federal Reserve rate-setting meeting would normally be top of the agenda for markets, but last week there was only one show in town.

After a divisive campaign full of twists and turns, Donald Trump’s US presidential election victory capped one of the most remarkable political comebacks. The oldest ever elected, Trump became only the second president in history to serve non-consecutive terms, and the first to have a criminal conviction.

Wall Street opened at a new record high on Wednesday, partly on relief that there was an uncontested result. The dollar posted its biggest one-day gain in over two years as the result became clear, underlining expectations that it will strengthen under a Trump presidency.

His plans to cut taxes and raise tariffs are likely to lead to higher inflation and growth, meaning the Fed will need to keep interest rates elevated to prevent the economy from overheating.

US bond yields soared on Wednesday, suggesting investors expect borrowing will increase under a Trump administration and therefore demand a higher return for their money.

Earlier in the week came news that activity in the US services sector had accelerated in October to a more than two-year high. The data added to other recent evidence of a stronger-than-expected US economy, leading some investors to question whether the Fed miscalculated when it kicked off its easing cycle with a chunky 50-basis point rate cut in September.

On Thursday, at the conclusion of its two-day meeting, the Fed duly delivered a more conservative 25-basis point cut in interest rates. Chairman Jerome Powell said it was too early to tell how the new administration’s agenda might affect the US economy or how the Fed should respond.

The National Institute of Economic and Social Research suggested the UK could be one of the countries most affected by a dramatic increase in trade tariffs, estimating that economic growth would slow to 0.4% in 2025, down from a forecast of 1.2%.

Acknowledging that the previous week’s Budget would cause inflation to creep higher, the Bank of England (BoE) also went ahead with its widely expected cut in interest rates from 5% to 4.75% but signalled that rates could now take longer to fall further. Although inflation fell below the Bank’s 2% target in September, it was always expected to rise again. The BoE now expects it to be mid-2027, and not mid-2026, before inflation drops back to target.

Expectations for future rate cuts are being scaled back on both sides of the pond after recent events. The Fed will need to tread carefully until the impact of Trump’s plans become clearer, while the BoE is likely to be cautious until the dust settles on Labour’s Budget.

Trump’s protectionist policies could also have huge ramifications for China. Exports have been the lone bright spot for its struggling economy and figures released last week showed them growing at their fastest pace in over two years as factories rushed out their goods in anticipation of further tariffs from the US and European Union. The US is China’s number one export market, worth more than $500 billion a year, but in a bid to boost manufacturing at home, Trump has proposed tariffs of 60% or more on Chinese goods.

While all eyes were on Washington, Germany quietly slipped deeper into political uncertainty as its coalition government collapsed after Chancellor Olaf Scholz sacked Finance Minister Christian Lindner, setting the stage for a snap election. It means Europe’s most powerful economy is effectively rudderless at a time when growth has stalled and the EU is nervously viewing an impending Trump presidency.

Reflecting on the US election result, Johanna Kyrkland, Group Chief Investment Officer at Schroders, continues to see a soft landing for the US economy, but acknowledges the key risk is on trade and the potential impact of a protective stance on growth outside of the US.

“We expect the Chinese authorities to continue with measures to offset this. Europe becomes more of a concern, however, as it could then become caught in the crosshairs of a more hostile trade environment - without the unified leadership required to tackle it.”

Wall Street continued its march after the Fed’s announcement, as investors digested the prospect of tax cuts, looser regulation and trade tariffs. The S&P 500 surged more than 4% in the week, blowing past 6,000 points to register its biggest weekly gain of the year.

But the market mood elsewhere was dampened on Friday on disappointment over a local government debt package announced by China – measures seen as stabilising the economy rather than providing the stimulus needed to boost growth.