Andrew Gillham
US blue-chip stocks endured their worst week since September as concerns over the near-term impact of the White House’s policies on the US economy intensified. Once again, the high-flying “Magnificent Seven” technology stocks suffered the steepest losses, led by Tesla which fell 22%. Shares in Elon Musk’s electric vehicle manufacturer have more than halved since reaching an all-time high in mid-December, wiping out $825 billion in market value.
The initial euphoria in the wake of the US election on expectations that the returning president’s pro-business agenda, including cuts to taxes and red tape, would boost the economy already seems a long time ago, and both the blue-chip S&P (-6.2%) and technology focussed Nasdaq (-10.9%) indices are in negative territory since the inauguration on January 20.
President Trump’s announcement on Monday evening of 25% tariffs on all imports from Canada and Mexico, triggered the initial sell-off and markets struggled to find their feet even when the measures were eventually put on pause for another month. A doubling of tariffs on Chinese imports to 20%, however, remained in place and China immediately retaliated by announcing its own tariffs of up to 15% on some US goods while restricting exports to 15 US companies in the aviation, defence and technology sectors. On Monday it went further and introduced more tariffs on agricultural imports, including soyabeans, pork, beef and seafood.
Markets struggle at times of uncertainty and between now and April 2, when reciprocal tariffs are expected to be announced, there is a lot of water to pass under the bridge. There is speculation that global trading partners, including the European Union, will be next on the list.
There are already signs that a more combative foreign policy, and the efforts of the Department of Government Efficiency (“DOGE”) to slash public-sector spending, are slowing the US economy. On Friday, the monthly nonfarm payrolls report revealed a lower than expected 151,000 jobs were added in January and the unemployment rate ticked up to 4.1%.
The Atlanta Federal Reserve’s GDPNow Model is now forecasting the US economy to contract at an annualised rate of 2.4% in the first quarter, and although it is an extreme outlier from economists forecasts, in an interview with Fox News over the weekend, the president declined to rule of the possibilities of recession or higher inflation later in the year and acknowledged there will be a “period of transition, because we’re doing is very big”.
In contrast, losses on European stocks were more muted, in no small part due to the most significant turning point for German economy policy since reunification. Faced with the prospect that Europe can no longer count on the US to guarantee its security, the government announced €1 trillion of debt-funded spending to upgrade is military and creaking infrastructure.
Germany has the strongest fiscal position in the G7 and has room to borrow much more but until now had resisted calls to loosen the purse strings. The surprise move triggered the biggest one-day sell-off in German government bonds since March 1990, in the early months following the collapse of the Berlin Wall.
The risk-off environment in broader markets continued to weigh on cryptocurrencies, including Bitcoin which fell another 7% and back below $80,000 for the first time since November. The White House hosted a round-table summit of leading crypto entrepreneurs after the president signed an executive order on creating cryptocurrency strategic reserve, but investors were left disappointed when it was revealed the government will use tokens obtained through investigations rather than acquisitions.
In commodities markets, Brent Crude was also under pressure, falling to $69 a barrel, its lowest level in six months. The OPEC+ cartel will start unwinding production cuts from April which will add around 138 barrels per day of supply at a time traders are concerned the headwinds faced by the global economy will cause an imbalance in the market.
The economic calendar for the week ahead is headlined by US inflation report for February. Consensus forecast annual CPI will slow from 3% to 2.9% which would be the first time that headline inflation has dipped below the psychologically important 3% threshold.
