Weekly Market Update - trade war brewing?

The latest economic news and market highlights from the UK and abroad.

The key takeaways

✂️ UK cuts interest rates – the BoE (Bank of England) cut its benchmark rate by 0.25% to hit 4.5%, marking its third cut in the current cycle. 

🌎 US tariffs shake global trade – the US announced 25% tariffs on its neighbours and allies – Mexico and Canada – with a 30-day delay on implementation. Trump also imposed a 10% tariff on China, effective immediately. 

🔎 China retaliates – in response, China slapped tariffs on select US companies and goods, including energy. The country also launched investigation into Google on alleged anti-trust concerns. 

📉 US job market fall – December data showed a fall of 556,000 job openings, which missed expectations, signalling a cooling labour market. 

📈 Euro Area inflation rises – annual inflation is estimated to have risen to 2.5% in January, exceeding expectations due to higher energy costs.

For UK investors, another rate cut from the BoE was welcome news, acknowledging the trend of easing inflation. What was more surprising was the lack of disagreement in the voting, with all rate setting members supporting a cut, and two even calling for a larger 0.50% move. Following the decision, and a speech from Governor Andrew Bailey, investors increased their bets of more cuts in 2025. 

Over in the US, trade tensions are heating up, with new tariff announcements and promises of retaliation sparking fears of a potential trade war. However, last-minute delays for Mexico and Canada following calls between country leaders and Trump, suggest room for negotiation. And while no tariffs were mentioned for Europe, the continent is bracing for when Trump’s eye turns to them.

In uncertain markets, staying informed is key. Keep an eye on these developments – they could shape the investment landscape in the months ahead.

Chart of the week - the importance of trade

Source: Apollo; World Bank, Apollo Chief Economist, February 2025

The chart above highlights how much of each country’s total GDP depends on trade, offering insights into how vulnerable their economies may be from possible tariffs and counter-tariffs. This is especially relevant when considering Mexico, Canada, and China are some of the US’s largest trading partners, for both exports and imports.

The negative repercussions for the US have been widely reported, ranging from rising domestic prices - especially in industries like autos, which rely on complex multi-country supply chains - to potential inflation spikes and market impacts, given the S&P 500’s strong dependence on overseas income. But it’s also worth bearing in mind the implications for Canada and Mexico. As the chart above shows, their economic growth is much more reliant on trade than the US, meaning they’d have a lot to lose from a decrease in exports to their largest trading partner. This is why striking a bargain with Trump may be in their best interest.

For all the countries involved, the uncertainty around tariffs, bargains, counter-tariffs, and further escalations all creates economic instability. Investors and policymakers may put-off key decisions until the situation becomes clearer, which could slow growth in the shorter term.

And, as with many of Trump’s moves, the real question remains: will these tariffs on Canada and Mexico actually go into effect next month, or will last-minute concessions smooth things over?

UK buoyed by cuts – markets benefited from the latest interest rate cut, gaining confidence on expectations that more cuts would follow. Sectors including healthcare, and aerospace and defence outperformed.

US fights headwinds – tariff concerns and continued tech uncertainty caused the S&P 500 to finish the week at a loss in USD terms. However, the NASDAQ managed a small gain thanks to strong financial and healthcare sectors.

AI fuels Hang Seng gains – Japan’s Nikkei 225 fell as consumer confidence dropped, while the Hang Seng rose thanks to the continued advancement of China’s AI sector.

Oil falls on global growth concerns – trade tensions and slowing global growth pushed oil prices down, on fears of reduced demand. Tariff discussions and doubts around growth had the opposite effect on gold, which rose as investors sought a safe haven.

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