Stocks remain resilient. Patience is required for buyers looking to buy the dip.

Tariffs are still front and centre

Once again, the global equity market is proving surprisingly resilient to what is going on in the world around it.

Trump has threatened to hit Europe with large trade tariffs, and Europe has promised to respond in kind. China has now been hit with more tariffs and has already responded in kind by implementing 10%-15% on crude oil, liquified natural gas, coal, farm machinery and pick-up trucks. However, it's also chosen other levers to pull, restricting access to 25 critical minerals and sanctioning several US companies.

Trump has also now announced a blanket 25% tariff on steel and aluminium exports to the US, and we all know he won’t stop there. In Asia, the news rattled South Korea, Vietnam, Australia, and Japan who are significant steel exporters to the US.

One likely outcome of the US president's tariffs is that they trigger higher prices and potentially disrupt the energy, car, lumber and agricultural sectors in the US. If the 25% charge on Canadian and Mexican goods does still go through, then prices for US consumers WILL increase. They are a nation that imports (this is what is at the heart of Trump's annoyance). The highest exporter of petroleum to the US is Canada (by some margin).

However, he might choose to lower the tariffs on oil, as he gets into ‘picking and choosing’ what suits him. The United States imports almost 4.6 million barrels of oil daily from Canada in a month and 563,000 barrels from Mexico, according to the Energy Information Administration.

Other nations will also retaliate, and things will almost certainly escalate. Both Canada and Mexico have said they have prepared the option of retaliatory tariffs to be used if necessary.

Canadian Prime Minister Justin Trudeau said on Friday: "We're ready with a response, a purposeful, forceful but reasonable, immediate response. It's not what we want, but if he moves forward, we will also act.

Even if all this mess does end up just being a rebalancing of what goes where and from whom, it will cause temporary chaos and be very costly to a lot of large corporations involved in global trade.

Most European nations’ economies have already flatlined – German GDP has barely grown in 3 years.

Only today Italian industrial output came out much weaker than expected for December, falling -3.1% from the month before and pointing to deepening problems for the country's stagnant economy. The month marked by far the biggest monthly fall in output for at least two years, the national statistics bureau ISTAT said, and the data was below all forecasts in a Reuters survey of 16 analysts which pointed to a marginal 0.2% decline.

Gross domestic product in the euro zone's third-largest economy stagnated for a second straight quarter at the end of 2024, ISTAT reported last month. ‘Analysts expect no significant recovery in the near term, with the outlook clouded by geopolitical tensions, the prospect of U.S. trade tariffs and the difficulties faced by Rome in deploying its EU pandemic recovery funds.’ (Reuters).

On a workday-adjusted year-on-year basis, industrial production was down in December by 7.1%, ISTAT said. That marked easily the steepest of 23 consecutive annual declines and followed a 1.6% drop in November.

Germany, Europe’s largest economy, could already be in a recession and trade tariffs will compound the problem. The German economy shrank by 0.2% in the 3 months ending in December. The country’s economic performance has long been sluggish, with quarterly GDP readings mostly hovering around the flatline in the past two years. The economy has however managed to avoid a technical recession by avoiding 2 successive negative numbers.

German GDP Growth Rate

On an annual basis, the German economy contracted in both 2023 and 2024, by 0.3% and 0.2% respectively. This may not qualify ‘technically’, but it really should.

This week France’s central bank announced that its nation's economy is heading for only slight growth at the start of the year and uncertainty remains high for business leaders. Gross domestic product will likely rise between 0.1% and 0.2% in the first quarter, with underlying momentum little changed from the end of 2024, according to the Bank of France’s monthly survey of 8,500 companies.

Its uncertainty indicator showed increases across sectors, with construction particularly affected by doubts around taxation and the budget, while industry was also rattled by concerns over geopolitics and trade tensions.

Last week, Prime Minister Francois Bayrou’s minority government forced a delayed 2025 budget through parliament after surviving a no-confidence motion. However, the finance bill does less to rein in the deficit than previously planned and relies partly on raising taxes on businesses.

It also depends on the economy growing 0.9% this year, an expansion that would require an acceleration from the rate estimated by the central bank for the first quarter.

The sluggish pace of growth in the euro area’s second-biggest economy adds to the challenges of political instability and rising public debt. That’s the economies 1, 2 and 3 in the Euro area all struggling.

On top of all this, European gas is up 14.9% over the last month and 117% year over year – this is never a good sign. UK gas isn’t far behind with a gain of 11.24% over the last month and 116% year over year (source: Trading Economics 12.02.2025).

If inflation returns, and rates can’t be lowered as fast as the market is currently predicting, things could go south very quickly.

Yet, somehow, European equities have had a good start to the year, and don’t seem to have been impacted at all. This does feel a bit like madness, but we have to go with it, as the market will do what the market wants.

On the week so far, the German DAX is up 1.4%, the CAC is up nearly 1% and the FTSE 100 is close to a 1% gain. The US inflation figure could well dampen the mood, but Europe seems strong at the moment. Perhaps it is simply a case of the US has lost momentum and the buying has to go somewhere.

Do we think the market should fall? Ultimately at some point, it probably should. But the market is a funny thing and everyone will say it was obvious after it’s happened but while it’s rallying they say that’s obvious too. At TPP we want the ups, but we also want the downs. We stand out from other portfolio managers because we actively trade the moves.

The one saving grace for European equities is that interest rates are likely to come down faster to protect the economy from suffering further, but ultimately, if rates are lowered because countries are entering recessions, then the market should still be cautious as recessions are not a reason to buy stocks.

If inflation returns, then rates will have to remain high and this is a problem; it is also what we’re seeing right now in the US.

US inflation figures released earlier today unexpectedly increased to 3 per cent in January, bolstering the case for the Federal Reserve to proceed slowly with interest rate cuts and hitting stocks and government bonds.

Today’s figure from the Bureau of Labour Statistics surpassed the expectations of economists polled by Reuters, who predicted that inflation would hold steady at December’s 2.9 per cent. The month-on-month increase for January was also ahead of expectations, at 0.5 per cent compared with a predicted 0.3 per cent. The figures led investors to bet that the Fed would cut interest rates just once this year. Before the publication of the inflation data, the futures market had expected the first cut to arrive by September, with a 40 per cent chance of a second reduction by the end of the year.

There is also now a very good chance the Fed won’t cut at all. We do feel that inflation is back. It’s not going to be near the numbers we saw in 2022, but it could well hang around the 3% mark for a while. The same could well be the case in the UK too but only time will tell.

When the figure was released this afternoon stocks got hit and bond yields soared. Every major group in the S&P 500 fell, with the benchmark down about 1%. Treasuries tumbled, with benchmark 10-year yields climbing 10 basis points to 4.63%. A sell-off in major exchange-traded funds tracking both asset classes showed the market was poised for its worst cross-asset reaction to the consumer price index in about a year. The dollar climbed against other major currencies.

However, as we’ve seen so many times recently, the market recovered and the buying continued. No matter what is thrown at it right now, stocks seem to go up. There is very little to be positive about, yet the market ploughs on. What will break it? We don’t know.

We aren’t saying it definitely will break, but it could, and being cautious is never a bad thing. Certainly at TPP, our traders are treading very carefully having had a great start to the year. Money has been made, and now patience is required. As Warren Buffett famously said, ‘The stock market is a device for transferring money from the impatient to the patient’.

Right now, patience is required. Pretty much all economies a slowing down and President Trump has declared (trade) war on the world.

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