It will be an interesting session for financial markets today. Donald Trump’s reciprocal tariffs are once again dominating markets. Canada and the EU are preparing a raft of retaliatory measures, while the UK hopes not to be the tall poppy and aims to use diplomatic measures to deflect tariff threats. Investors are seeking solace in the gold price, which is above $3,080 at the time of writing, and is higher by another $27 per ounce on Friday. Gold and silver are outperforming stocks this week and the precious metals are higher by 2% and 4% so far this week.
Stocks sell off, gold rises, FX remains neutral in the face of tariff threats
As we move into the end of this week, its hard to see a reversal in risk sentiment. Asian stocks sold off on Friday, and Japan’s Nikkei was down some 1.8%. European and US stocks managed to pare losses late on Thursday, and US futures are expecting a mild sell off later today. Investors are holding back to see what next week holds, as fears of a futile, growth destroying trade war starts to take hold. For now, the economic backdrop is one that is good for gold and silver, but bad for stock market bulls, as the rally in European and Chinese shares has stalled. The FX market is more interesting. There is little sign of a rush to safe havens, and the yen is only mildly higher vs. the USD so far this week. Likewise, although EM FX has taken a knock vs. the USD this week, the sell off has been mild. The Mexican peso is down 1.39%, however, the Brazilian real is higher by 0.3% vs. the USD.
Financial markets are not in panic mode about tariffs
Although the headlines are getting ever more hysterical about tariffs, the financial markets are not in panic mode yet, suggesting that the impact from tariffs could be milder than expected, or that they won’t be permeant and Donald Trump will reverse course on tariffs in time.
UK bond market sells off, but there’s no panic in the air yet
The UK is also in focus this week. The UK bond market had a mini wobble on Thursday after Wednesday’s spring statement. UK gilts have underperformed the US and Europe this week, but 10-year bond yields are still only higher by 7bps. This suggests that the bond market is watching the situation regarding the UK’s tight fiscal headroom, but is not pricing in the prospect of damaging tax rises at the next Budget in October. Likewise, 2-year bonds are also underperforming their peers, but yields are only up by 5bps, which is fairly mild relative to the reaction after other fiscal events.
UK data: retail sales suggest the UK consumer is not dead yet
The UK released a raft of economic data this morning. The final reading of Q4 GDP was confirmed at 0.1% for Q4, although the annual rate of growth was revised higher to 1.5% from 1.4% previously. There was better news for exports and business investment wasn’t as bad as first thought. Added to this, the UK’s current account deficit was narrower than expected, which is mildly pound positive.
The February retail sales data from the UK was also a bright spot. The UK consumer is alive and well, retail sales excluding fuel, rose by 1% last month, defying dears of a 0.5% slump, the annual rate came in at 2.2%, reversing January’s weakness. This suggests that the UK economy may ‘bounce’ back after a weak start to the year, and it comes after the better-than-expected services sector PMI for March. The trade data was not great, and the January trade balance was weaker than expected, however, most of this was down to previous metals, excluding precious metals, the trade balance for January was £537mn in surplus. This corresponds to the strong rally in gold that is attracting a raft of investment into precious metals.
Don’t dismiss the UK’s economic green shoots
The media is focused on the UK’s fiscal woes, but today’s retail sales suggest that growth might be better than expected, which would be a major lifeline to the Chancellor. Citi’s UK economic surprise index has been relentlessly negative since November, but there are signs that it may be stabilizing and could pick up from here. If it does, then this could boost sentiment towards the UK.
Ahead on Friday, we expect markets to be somber ahead of next week’s tariff update from the US, however, we do not think that the markets will sell off sharply from here, although some downside could be expected. Stocks are in the firing line, and the markets are still not keen on big tech, the IT sector was one of the worst performing sectors on the S&0 500 on Thursday. The tech sector is expected to be mildly impacted by tariffs, so we don’t think that tariffs are driving the selloff in tech. This is another sign, in our view, that financial markets are currently judging tariff risks to be moderately bad rather than devastating for the economy.
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