You don’t know what you’re doing

Premiership football managers don’t seem to last very long these days. Just before Christmas, Wolves and Southampton bid adieu to their managers, while already in 2025, both West Ham and Everton have made new appointments.

What has this to do with the stock market? Lord Michael Spencer, founder of brokerage ICAP, recently said chief executives of London-listed companies should be able to be paid like ‘top-rate footballers’ without facing a backlash. ‘We don’t mind paying our footballers, top-rate footballers, extraordinary amounts of money. Somehow that’s considered perfectly acceptable. However, if the CEO of BP or HSBC earns £20m a year, materially less than their peer group in America, everyone jumps up and down saying this is an outrage.’

The median pay of a FTSE 100 CEO was over £4m last year, but this compares with $16m for US S&P500 bosses. If you want the best talent, you must pay up!

Talking of managers, Sir Keir Starmer has not had the greatest start in the premiership, and his popularity rating has plummeted to a new low! Markets are expecting UK economic activity to pick up in 2025, but performance in the run-up to Christmas has been poor, with consumer, business, and market confidence all taking a hit from the Budget. To add to his woes, the cost of UK government borrowing has just hit a 27-year high. Could some of Sir Keir’s squad, namely Chancellor Rachel Reeves, be substituted early if performance does not improve in 2025?

What have we been watching?

Last week saw a sudden shift in sentiment with a growing expectation of higher-for-longer interest rates due to Trump’s expected economic policies, particularly tariffs, which are seen as inflationary.  As a result, government bond yields rose around the world. Much stronger than expected US jobs data on Friday, together with ‘hawkish’ commentary from some members of the Federal Reserve (Fed) combined to drive the 10-year US Treasury yield up to 4.8%, while the 30-year yield touched a 12-month high. UK gilt yields have also risen, with the 10-year gilt yield rising to 4.9% in what could become an ‘annus horribilis’ for Chancellor Rachel Reeves with the cost of government borrowing at a 27-year high. Besides the rise in global bond yields, the UK government has been penalised for its inflationary Budget which has also hit business confidence. 

Markets briefly welcomed media reports that Donald Trump’s aides were exploring plans to apply global trade tariffs on critical imports only, but this proved short-lived as it was denied via Truth Social. Is this the new normal with Trump dropping ‘truth bombs’ on his policy intentions in an ad-hoc manner? Furthermore, Trump is reported to not be happy with Elon Musk and hates the ‘President Musk’ joke. How long will the bromance’ last? Meanwhile, Trump made alarming comments about the Panama Canal and Greenland, as well as demanding a 5% NATO defence spending target. How many European NATO members can afford that? The UK certainly can’t! Otherwise, investors are trying to second-guess just what Trump will do on trade tariffs when he takes up office next week. He is believed to be considering declaring a national economic emergency in order to create the legal grounds for introducing his tariff plan. He has also threatened Denmark with tariffs over Greenland!

A new year and Chinese/Taiwan relations remain as tense as ever.  An undersea communications cable offshore Taiwan was damaged in a suspected sabotage incident with a Chinese vessel dragging its anchor.

Ukraine launched a counterattack in the western border region of Kursk. The assault comes as both sides seek to strengthen their negotiating hand ahead of Trump’s inauguration.

Even before Trump’s inauguration, trade relations between the US and China remain tense. The US Defence Department has added China’s WeChat owner Tencent and Tesla battery supplier, CATL, to a list it says are affiliated with the country’s military. Meanwhile, US Treasury Secretary Janet Yellen has raised concerns with Beijing about ‘malicious cyber activity’ by Chinese-state-sponsored actors. Meanwhile, China’s Ministry of Commerce is reported to be considering an export ban on some lithium battery technology.

 

In the UK, a survey by The British Chamber of Commerce showed that business confidence has slumped to a two-year low following the Budget, with more than half of companies planning to raise prices by April. BRC retail sales for December increased by 3.2% but were, of course, flattered by the shift of Black Friday from November into December. The ‘golden quarter’ failed to give 2024 the send-off retailers were hoping for. Meanwhile, grocery inflation ticked up to 3.7% in December. This is not good news for the Bank of England, neither is gas prices hitting a 12-month high with the cold snap coinciding with Russia’s Gazprom finally stopping gas exports to the EU via Ukraine.

There was also more bad news for Chancellor Rachel Reeves, as the cost of government borrowing hit the highest level since 1998. This will wipe out virtually all the headroom the Chancellor recorded in October, implying more spending cuts and tax rises if the OBR is not to declare the government in breach of its day-to-day spending by 2029/2030. The OBR will deliver its latest forecasts on 26th March. Reflecting the economic uncertainty, Sterling dropped to below $1.22—good news for exporters but not for inflation. 

 

In Europe, Austria’s president has tasked the leader of the populist Freedom Party with forming a coalition government. If the talks are successful, Austria will, for the first time, have a government led by the Eurosceptic, Russian-friendly Freedom Party. Meanwhile, inflation in the eurozone increased to 2.4% in December in line with expectations. Core inflation was also in line at 2.7%. Service sector inflation remains ‘sticky’ at 4%.

 

US December jobs data was much stronger than expected, leading markets to pare back expectations for interest rate cuts by the Federal Reserve (Fed) in 2025. The potential for an inflationary impulse from Trump’s policy agenda does raise questions as to how many further cuts will be appropriate. Markets had already reduced the likelihood of a 1% cut to 0.5% in 2025, but this has been scaled back to just one cut of 0.25% with some suggesting a pause in the interest rate cutting cycle.         

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Brent oil moved up to $79 as the Biden administration launched new, stricter-than-anticipated sanctions on Russian energy, which is not helpful for the inflation outlook.

 

Finally, looking into 2025, a reminder of Trump’s unpredictability—the Panama Canal and Greenland!   He warned that if Panama cannot ensure the canal’s ‘secure, efficient, and reliable operation, then we will demand that the Panama Canal be returned to us, in full, without question.’ Trump has also reiterated his desire to acquire Greenland, saying it is critical for national and economic security. He has refused to rule out military force! What will Russia make of this? More significantly, what message does this send to China as regards Taiwan?

 

Read Last Week’s Alpha Bites – Will we survive Trump 2.025

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