Weekly Market Update - 4 February 2025

European equity markets finished January at record highs last week. However, US President, Donald Trump, announced tariffs on goods from Canada, Mexico, and China over the weekend, suggesting that February might prove more challenging.

However, in the time between drafting this weekly update and publishing, Trump strikes again. According to latest headlines, Trump promised to delay tariffs on Canada and Mexico by one month, however, no delay for China.

A 2% rise in the FTSE 100 meant the UK index finished the month up over 7%.

The upbeat nature of UK markets was at odds with the wider economic performance of the country. The UK has been experiencing a prolonged period of weak economic growth and above target inflation. On top of this, business confidence has been subdued, and the Government has found itself with limited financial options to generate growth.

However, many of FTSE 100 companies earn the majority of their income overseas. As the pound is currently weak against the US dollar (and other currencies), earnings brought back to the UK are worth more when translated back into sterling.

January was similarly positive for European markets. Like the FTSE 100, the MSCI Europe ex UK hit record levels at the end of January.

Last week the European Central Bank (ECB) cut interest rates. Given the weak economic news from much of the bloc, the ECB is expected to continue cutting rates at the year progresses.

Turning to the US, the week started on a negative note for the tech sector. The Chinese DeepSeek AI model casting serious doubt that America’s lead in the field was untouchable. It also raised questions over the market value assigned to several AI-related companies.

Nvidia, which has experienced extraordinary growth over recent years, suffered the largest single daily drop in stock market history. Last Monday, close to $600 billion was wiped from its value. Although it recovered over the second half of the week, the share price finished down approximately 15%.

Martin Hennecke, Head of Asia & Middle East Investment Advisory at St. James's Place, said: “Just when it seemed that the US tech/AI rally and dominance would last forever, the news on DeepSeek as a potential industry disruptor hit home hard. There is uncertainty about specific market impacts as yet, and it may still turn out to be less of a bombshell than initially thought. However, it does serve as a timely reminder of the importance of maintaining prudent risk management and diversification at all times.”

Tariffs

Over the weekend, US President Donald Trump confirmed 25% tariffs for Canadian and Mexican goods (bar energy imports from Canada, which will face a 10% tariff). China will face 10% tariffs.

Soon after, Canadian Prime Minister, Justin Trudeau announced 25% tariffs on a wide spectrum of US goods, while both China and Mexico promised responses of their own.

For his part, Trump has also put the EU in his crosshairs for tariffs in the future, telling the BBC: “It will definitely happen with the European Union.”

On the UK, Trump’s language has so far been less explicit. This could result in Prime Minister Starmer needing to find a balancing act between his aim of ‘resetting’ the relationship with the EU, while avoiding Trump’s ire.

Although it will take time to fully unpack all the implications of a potential trade war between the US and the EU, Canada, Mexico and China, markets have so far delivered a fairly standard response. The FTSE 100 opened this week down 1.3%, while markets in France, Germany and Japan were down more than 2%.

The falls caused by the tariffs were fairly broad based, but car manufacturers were amongst the worst hit. Several European car manufacturers shares fell over 4% on Monday morning.

Commenting on the tariffs, Hetal Mehta, Head of Economic Research at St. James's Place, said: “The news of tariffs levied by the US against Canada, Mexico and China will inevitably raise questions on how central banks - especially the ECB but also the Bank of England (BoE) – should respond should they also be subject to such protectionist measures. It is too late for the BoE to adjust its forecasts and assumptions for global growth, but any further weakness in the euro area economy will likely spillover to the UK. For some MPC members, the case for a pre-emptive cut may be enhanced."

She adds: "Ultimately, the US consumer has been the powerhouse for the economy, and one way or another is now on the hook for paying for these tariffs (higher inflation, higher interest rates, or perhaps further down the line, higher taxes)."