December 2024 | Investment update

Trump’s election victory fuels renewed market optimism

US still on target for a soft landing. The US economy continues to grow at a robust rate and looks on target for a soft landing – where inflation falls without causing a recession. Inflation has come down from its generational high of 9.1% in June 2022 and the jobs market has remained resilient under President Joe Biden. However, many Americans still aren’t feeling the benefits, with almost half mistakenly believing the economy is in recession.

China’s economic growth rate has stalled since emerging from the pandemic and it looks unlikely to hit its 5% target this year. Meanwhile, rising tensions in the Middle East have added new uncertainties for the global economy. Following the election of Donald Trump as US president, there are also concerns that his proposed trade tariffs could unsettle the global economy from next year.

Markets rally after Trump wins. US stocks rallied to record highs after Trump won the 2024 US presidential election. The Republican win sent US Treasury yields sharply higher (meaning prices fell), while the dollar rose to the strongest level in a year. The FTSE 100 came under pressure as concerns grew about what the Trump presidency means for the UK and UK-listed companies, along with some disappointing earnings updates.

Global share prices fell briefly and investors fled to safe-haven assets such as gold as markets reacted to escalating tensions between Russia and the US over Ukraine. Gold climbed higher and the oil price rose as Russia and Ukraine launched missiles at each other. China’s markets also dipped after a fiscal stimulus package announced by authorities to help shore up its economy underwhelmed investors.

UK inflation ticks up. While UK inflation went up by 2.3% in the 12 months to October, there was good news for borrowers after the Bank of England cut interest rates by a quarter percentage point from 5% to 4.75%. However, the central bank said that the changes made by the government in the recent Autumn Budget could add to inflationary pressures.

The UK economy showed a surprise contraction in September, after shrinking by 0.1%. Meanwhile, growth slowed to a crawl over the third quarter, with uncertainty over the Budget being blamed for weak growth. The country’s job market showed further signs of cooling after a rise in unemployment, while pay growth slowed. Business leaders have warned that tax increases announced in the Budget could lead to job cuts. In more positive news, retail confidence appears to be improving as Christmas approaches.

Europe’s growth remains sluggish. Europe’s economy expanded at its fastest pace in two years in the third quarter, boosted by stronger-than-expected growth in both Germany and France. However, underlying activity remains sluggish. Germany showed positive growth in the third quarter, mainly due to strong public and private consumption. But in a sign of deepening problems, Volkswagen– Germany’s largest industrial employer – has announced plans to shut at least three factories.

France posted better-than-expected economic growth, thanks to additional activity generated by the Olympic Games in August. Italy’s came in below expectations, due to a slump in manufacturing. The average pace of inflation across the region rose by more than expected to 2% in October. However, core inflation – which excludes more volatile food and energy prices – remained stable at 2.7%.

Donald Trump elected US president. Donald Trump was elected the 47th president of America in a stunning political comeback. The former president will return to the White House after his election victory over Democrat opponent Kamala Harris. Meanwhile, the US Federal Reserve (Fed) lowered interest rates by a quarter percentage point to 4.5%. It is the second cut since the central bank began to reduce borrowing costs in September following a prolonged period of high rates to combat excessive inflation.

Fed Chair Jerome Powell affirmed his commitment to serve out his term even if President-elect Donald Trump attempts to fire him. Inflation ticked up to 2.6% in October from 2.4% in September, which had been the slowest rate in more than three years. The US added just 12,000 jobs in October, in a report heavily affected by the strike at Boeing and two recent hurricanes.

Japan re-elects Ishiba. Japan’s parliament re-elected Prime Minister Shigeru Ishiba after his governing coalition lost its majority in a lower house election in October. Ishiba took over as prime minister from Fumio Kishida, who stepped down in September amid a series of political scandals. He will now lead the country’s first minority government in more than 30 years.

The Japanese government is planning an extra budget of about ¥13.5 trillion ($87 billion) to fund a stimulus package to help low-income households and offset rising prices. Japanese inflation continues to gain momentum, with wholesale inflation accelerating in October at the fastest annual pace in more than a year. Given the yen’s recent weakening against the dollar, some economists expect the Bank of Japan to raise interest rates at its next meeting in December.

China unveils stimulus package. China approved a $1.4 trillion plan to bolster its flagging economy by allowing local governments to refinance their debt. It marks the second stimulus package in recent weeks to increase growth. However, analysts have warned that the measures are unlikely be enough to boost economic activity in the short term.

GDP grew by just 4.6% in the three-month period from July to September, and there is a risk that China may miss its annual growth target rate of around 5%. Exports in October rose at their fastest pace in 19 months but imports fell by more than expected. China’s consumer prices rose at the slowest pace in four months, while producer price deflation deepened.

Global outlook faces mixed signals. The US is expected to drive global growth for the remainder of this year and into 2025. The International Monetary Fund (IMF) has raised its forecast for UK growth in 2024, citing stronger demand driven by falling inflation and interest rates. Despite better-than-expected performance, the UK’s economic outlook remains uncertain.

Proposed tariffs by Donald Trump could trigger a trade war with Europe and China, which risks pushing up inflation in the US and slowing the pace of Federal Reserve interest rate cuts. This uncertainty may dampen growth in the UK and euro area by inflating prices for imported goods. China faces heightened risks from its property market struggles, rising debt and weak domestic demand. Meanwhile, escalating tensions between Russia and Ukraine have added to the challenges ahead.

Thank you for reading and please look out for another update next month.

Ascot Lloyd Investment Team

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