A strong week for European Equities, as the FTSE 100 stars. The TPP weekend wrap.

A Strong Week for European Stocks

Weak data didn’t stop stocks from rising this week. This week the FTSE 100 stormed higher with a gain of 3.11% even as the UK economy only grew by a disappointing 0.1% in November, undershooting analysts’ expectations, as chancellor Rachel Reeves comes under increasing pressure to rebuild confidence in the government’s fiscal plans.

The monthly figure was below the 0.2 per cent growth forecast by economists polled by Reuters and follows a 0.1 per cent contraction in both October and September, according to data published on Thursday by the Office for National Statistics.

Thursday’s data will not dispel concerns over the performance of the UK economy after fears of stagflation, when sluggish growth is accompanied by persistent price pressures, contributed to a sharp rise in borrowing costs at the start of the year. Gilt yields have fallen back in the past couple of trading sessions, as investors have priced in more rate interest cuts by the Bank of England this year.

Labour swept to power last July with a promise to put growth at the heart of its agenda, but Reeves has faced criticism over her October Budget, which left businesses bearing the brunt of £40bn of tax increases. “This disappointingly modest return to growth for the UK economy is unlikely to ease stagflation concerns,” said Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, adding that it was “unlikely to have sparked a more notable improvement in economic activity across the fourth quarter”.

On top of this, there was more disappointing news as UK retail sales unexpectedly fell in December, according to data released on Friday by the Office for National Statistics. Retail sales declined by 0.3% on the month following a downwardly revised 0.1% increase in November. Economists were expecting a 0.4% jump.

ONS senior statistician Hannah Finselbach said: "This was driven by a very poor month for food sales, which sank to their lowest level since 2013, with supermarkets particularly affected." The ONS said falls in supermarkets were partly offset by a rise in non-food stores, such as clothing retailers, which rebounded from declines in recent months.

For the fourth quarter, sales volumes fell by 0.8% compared with the third quarter but rose by 1.9% versus the same period a year earlier.

There was however, some good news earlier in the week for consumer price growth which unexpectedly slowed to 2.5% in December from 2.6% in November, bolstering expectations that the Bank of England could cut rates as soon as February. Underlying inflationary pressures also subsided. Services inflation, which is closely followed by policymakers, decelerated to an almost three-year low of 4.4% from 5%. Core inflation, which excludes food and energy prices, declined to 3.2% from 3.5%.

The month-over-month figure was still positive coming in at 0.3%, slightly higher than the monthly target of 0.17%. Annual inflation will rise next month so the celebration will be short lived but these days we take all the good news we can get.

Europe

The pan-European STOXX Europe 600 Index ended 2.37% higher as slower-than-expected inflation on both sides of the Atlantic raised hopes that central banks can keep cutting interest rates this year. Major stock indexes rose sharply. France’s CAC 40 Index climbed 3.75%, Germany’s DAX gained 3.41%, and Italy’s FTSE MIB added 3.36%.

Germany's economy shrank 0.2% in 2024, its second consecutive annual contraction. A drop in investment was the main cause of last year’s weakness, although this headwind was partly offset by a rebound in private and government consumption.

German inflation was released on Thursday as 0.5% month over month giving the annualised figure of 2.6%. This is on the high side particularly on the continent in Europe where inflation has been under control for 6 months or so now.

Inflation in France dipped below the 2% target in August and the theme continued there this week as we saw the latest release which came in at 0.2% for the month and 1.3% year over year. This figure is the same in Italy (1.3% released on Thursday) so the ECB should be confident enough to continue to lower rates over the course of the year.

However, the minutes of The European Central Bank’s December meeting suggest they believe they need to lower interest rates cautiously and gradually. They have now reduced rates three times in a row. The market appears to expect another quarter-point reduction in the deposit rate to 2.75% at the end of January.

ECB Chief Economist Philip Lane, Vice President Luis de Guindos, and policymakers Yannis Stournaras and Mario Centeno echoed this message. Lane and de Guindos emphasized the exceptional uncertainty around the outlook, driven by potential global trade frictions, geopolitical tensions, and fiscal policy concerns in the euro area.

The US

Major US stock indexes finished the week higher, rebounding from a sharp sell-off at the end of the prior week. As measured by Russell 1000 indexes, value stocks outperformed growth shares by the widest weekly margin since September, driven in part by outperformance in the energy sector amid higher oil prices and some profit-taking in large-cap technology stocks. The financials sector also posted strong weekly gains, aided by some upside surprises to kick off earnings season. Shares of JPMorgan Chase, Goldman Sachs, Citigroup, and Wells Fargo all rose after the banking giants reported surges in profits during the fourth quarter.

The highlight of the week’s economic calendar came on Wednesday with the Labour Department’s December inflation report. While the headline number indicated an acceleration from November, core inflation (less food and energy) rose by 0.2% in December, a tick lower than the prior month and the smallest increase since July. Year-over-year core inflation also slowed, to 3.2% from 3.3% in November.

The data appear unlikely to be significant enough to convince the Fed to cut rates at its upcoming January policy meeting (futures markets were pricing in a near 100% chance that rates will be unchanged at the January meeting); however, the December numbers provide optimism that the Fed is still making progress on bringing down inflation following several months of elevated readings, which keeps the door open for potential rate cuts later in the year. Stocks advanced following the release, and the S&P 500 Index, Dow Jones Industrial Average, and Nasdaq Composite all recorded their largest one-day gains since the postelection rally in November.

Asia

Japan’s stock markets lost ground over the week, with the Nikkei 225 Index falling 1.9% and the broader TOPIX Index down 1.3%. Hawkish signals from Bank of Japan (BoJ) officials increased expectations that the central bank could raise interest rates at its January 23–24 monetary policy meeting. This lent support to the yen, which strengthened to around JPY 155.6 against the U.S. dollar, from about JPY 157.6 at the end of the previous week. The strength of the yen weighed on the profit outlook of Japan’s export-heavy industries. Within fixed income, the yield on the 10-year Japanese government bond rose to as high as 1.25% during the week, nearing its highest level in 14 years, but eventually settled at the 1.20% level.

Chinese equities rose as the economy improved despite persistent deflationary pressures. The Shanghai Composite Index gained 2.31%, while the blue chip CSI 300 added 2.14%. In Hong Kong, the benchmark Hang Seng Index was up 2.73%, according to FactSet.

China’s GDP expanded a better-than-expected 5.4% in the fourth quarter from a year earlier, surpassing the 4.6% growth in the third quarter. On a quarterly basis, the economy grew 1.6%, up from a revised 1.3% gain in the prior quarter, while GDP for the year reached 5%, hitting Beijing's annual growth target.

Other data also showed signs of recovery. Industrial production rose an above-forecast 6.2% in December from a year earlier, up from November’s 5.4% increase, partly due to higher auto, computer, and solar cell sales. Retail sales grew 3.7% in December from a year earlier, up from a 3% increase in November. Fixed asset investment was 3.2% in the January to December period from a year ago, down slightly from a 3.3% rise in the prior month. Property investment declines deepened to 10.6% year on year, while the unemployment rate ticked up to 5.1%.

The Week Ahead

Next week promises to add to the picture of the state of the UK’s economy, with unemployment, government borrowing and confidence data all due.

Tuesday brings job market figures from the Office for National Statistics, incorporating both the unemployment rate and wage data.

Following figures pointing to slowing economic growth in November this week, eyes will be on both for clarity around already sky-high bets for a February rate cut. According to Trading Economics, expectations are for unemployment to have remained flat at 4.3% in November, as average earnings growth picked up from 4.9% to 5.2%.

Public sector net borrowing will then dominate headlines on Wednesday, before CBI business optimism and Gfk consumer confidence data on Thursday and Friday respectively. After November’s £11.25 billion deficit, net government borrowing is predicted to have hit £11.3 billion in December.

Early readings for this year are then anticipated to see consumer confidence and business optimism falling further as concern grows around the likes of wider economic woes and feedthrough of Budget-related cost pressures.

In the US, Donald Trump’s inauguration on Monday and any subsequent policy announcements will be key.

Eyes will be on any rapid executive orders after Trump has signalled plans for the likes of sweeping tariffs and energy sector deregulation.

Purchasing manager index readings are also due from each of the UK, US and Europe over the week.

Burberry, Wetherspoons, easyJet, Primark owner ABF, Abrdn and Severn Trent are among those teeing up a busy week of updates ahead.

Abrdn will kick off proceedings on Tuesday following a quiet start to the week before Wednesday sees Wetherspoons and easyJet feature.

Eyes will be on easyJet's outlook after a surge in oil prices recently, while Spoons' update follows a run of strong Christmas numbers from pub peers.

Thursday then brings ABF's update after analysts flagged caution around sales ahead for subsidiary Primark.

Burberry and Severn Trent will follow on a busy Friday, with the former's turnaround and any further hints of a luxury sector rebound in focus.

Across the Atlantic, Netflix, J&J, P&G and American Express are all in line to update.

On our platform:

A solid week across the board on TPP, and if profits weren't taken in the middle of the week, it could have been even better as European equities rallied at the back end of the week.

The leveraged trackers on TPP posted hefty returns this week, and many of our Long or Flats took profits as markets bounced midweek, ensuring they locked in some decent profits for January.

Our active strategies are also in the main on the BUY side right now, but as the week evolved and equites rallied, the position size on these strategies became smaller and smaller as profits were taken.

The result of this by the end of the week, was that a profitable week was had by all, but as of right now the platform as a whole has a SMALL net BUY position.

You may have read during this week that Warren Buffett is currently holding a record amount of cash, which we would expect for him to deploy in the event of a market pullback.

As I write this currently, we're similar.

We're in the market, but with a smaller position than usual.

Currently, for every 1% global equities move up, we would probably only make 0.5%. This is a conservative approach, and I would expect any sort of market retracement would witness positions being added into the market.

For a platform that occasionally has 3 x market leverage, it's a prudent and patient approach whilst we wait for that next opportunity.

With a traditional portfolio, this week may also have been a positive one thanks to the rally at the back end of last week. However, what would happen if markets retrace this coming week?

I would expect all of the profit is given back. This is why we're different. Of course we won't time every top and bottom correctly, but with subtle little tweaks to our portfolios, we can take a portfolio that tracks the markets, into one that beats it consistently.

We're very confident in regards to our selection of strategies coming into 2025, and we look forward to delivering for you over the course of this year.

Enjoy the rest of your weekend.

‍