Trump, Trade and Tariffs – Will the Truce set the Market Free?

After reaching multi-month highs earlier in the week, global equity markets have paused rather than surged further. US equities rose as much as 2% during the week hitting another all-time high but faded to just 0.5% up by Thursday’s close.

So, what have been the main drivers of market dynamics this week?

1. Fed rate cut

The Federal Reserve (“the Fed”) delivered a 25 basis-point rate cut to a target range of 3.75 - 4%, but markets quickly cooled, and bond yields rose (as bond prices fell) in response. While the cut was anticipated, Fed Chair Jerome Powell and other officials poured cold water on expectations for an imminent subsequent move, warning that any further easing was contingent on fresh data. Amid those policy moves, investor sentiment shifted. The initial market relief from the Fed’s cut faded once the language around future cuts looked more guarded.

2. Corporate earnings season

This is the period each quarter when listed companies release their financial results, and we are right in the middle of it, with about half of all companies in the US and Europe having reported so far. This week, results have been mixed. Some of the large technology firms in the US posted stronger-than-expected profits, helping to steady markets early in the week. But weaker numbers from industrial and consumer companies, both in the US and Europe, reminded investors that higher costs and slowing demand are still squeezing margins. Overall, we note that earnings growth is coming in better than markets expected, in both the US and European equity markets.

3. Geopolitical tensions eased

Equity markets responded early in the week to signs that US–China trade relations might be easing. This optimism helped lift both European and US shares. But analysts cautioned that any progress is likely to be partial and fragile, creating uncertainty for investors. There has also been scepticism about the nature of Trump’s “truce”, which appears to generally favour the Chinese. Nonetheless, a de-escalation of tariff threats and trade tensions has been received positively by markets, as expected.

In summary, this week’s market movements reflect a delicate balancing act between optimism and caution. While the Fed’s rate cut, easing geopolitical tensions, and strong tech earnings provided early support, Fed guidance on future rate cuts and mixed earnings in consumer sectors have restrained further gains.

The Noise

• In currency markets, the pound sterling hit its weakest in nearly three months against the US dollar and its weakest in more than two years versus the euro on Wednesday as rising expectations for a rate cut from the Bank of England by year-end pushed the currency lower. This was reflected in the Dollar Index, which measures the US dollar against a basket of major peers like Sterling, rising 0.7% this week. The uncertainty over another US rate cut in December helped keep the dollar near three-month highs.

• This dollar strength directly pressured gold, since the US dollar price drives the global market, making gold more expensive for buyers in other currencies. Gold lost some of its shine this week, down 2.1%. In short, gold’s weakness and the dollar’s strength were two sides of the same coin.

• UK government bonds, or gilts, which were hit hard earlier this year by fiscal worries, traded better than their US counterparts. UK yields, which fall when prices rise, are on track for their largest monthly drop since December 2023.In contrast, comments from the Fed pushed US bond prices lower and yields higher.