21st January 2025

Much like his billowing hairstyle, the cloud hanging over Q4 was equally impossible to ignore and endlessly discussed. With Donald Trump’s imminent return as the soon to be 47th President of the United States, market reactions to this have been mixed.  His presidency is widely forecast to be inflationary, reinforcing expectations that interest rates will stay elevated for longer. His proposals including high tariffs, lower taxes, steep immigration cuts and the potential for mass deportations have unsettled bond investors.

Equity markets in the US, however, have surged, with the main market finishing the year more than 23% higher than it began in January. During Mr. Trump’s previous term, US equities soared by nearly 65% (S&P 500), led by financials and industrials. Policies such as tax cuts, incentives for onshoring, and deregulation are expected to bolster the US economy, particularly smaller companies.

Broadly, Trump’s return has been welcomed by investors in risk assets like equities but has created headwinds for non-risk assets such as bonds.  Expectations of trade tensions following Mr. Trump’s election initially shook global equity markets, with markets in Europe and China contracting notably. However, these markets have since recovered and are contending with their own particular challenges.

Looking to the U.K., the economic picture remains lacklustre. Q3 growth was reported at just 0.1%, reflecting a sluggish economy. This was further underscored by a 3.3% drop in retail sales during November and a significant decline in manufacturing activity, with output contracting sharply as businesses reported weaker demand and production levels. Rachel Reeves’ budget has been widely deemed inflationary, with measures such as National Insurance hikes further straining business and passing costs on to consumers. The government is prioritising efforts to tackle widespread economic inactivity through job incentivisation schemes alongside record-breaking levels of inbound immigration. Despite this, inflation surprised many, rising to 2.6% in November, complicating the Bank of England’s attempts to normalise monetary policy following a 25-basis-point rate cut during the quarter bringing rates to 4.75%. Rate cuts in the UK, alongside dollar strength caused by expectations of higher rates for longer in the US, contributed to GBP falling against USD.

Staying close to home, Europe remains mired in familiar, yet no less pressing, challenges. Political instability continues to plague the region, with the French government dissolving following a vote of no confidence, as right-wing parties across Europe continue to make ground against incumbent governments widely viewed as listless. French government bond yields surpassed those of Greece, highlighting the country’s precarious position financially, politically and geopolitically. Eurozone growth remains weak, inflation has climbed to 2.2%, and labour markets remain tight. Germany, the economic engine of Europe, continues to grapple with flat growth driven by slumping industrial output, labour disputes, and persistently high energy costs. Fiscal stimulus is under consideration as a potential remedy, whilst the European Central Bank cut rates to 3.65% in mid-December.

Asian markets were subdued in Q4 compared to the previous quarter, which had been marked by economic data surprises, stimulus measures, rate cuts and the threat of forthcoming tariffs from the US once Mr. Trump is inaugurated. Following significant stimulus measures at the end of Q3, China unveiled a RMB10 trillion local government debt resolution package in November. However, the absence of expected bank recapitalisation and consumer stimulus disappointed markets. Despite subdued macro data, there were bright spots, including stronger-than-expected retail sales and a smaller decline in property market activity. Further stimulus announcements are anticipated across the coming months.

In Japan, November elections resulted in the incumbent Prime Minister, Shigeru Ishiba, losing his party’s majority. This mirrors global trends of incumbent parties facing electoral backlash. Whilst Japanese markets have been relatively unaffected, the outcome amplifies political uncertainty in the country.