Former central banker, Mark Carney, will be sworn in today as Canada’s 24th prime minister. He previously held the positions of Governor of the Bank of Canada from 2008 to 2013 before being appointed Governor of the Bank of England, serving from 2013 to 2020. He takes power at an extremely precarious time, with trade war tensions between Canada and the US at extreme levels. It’s clear he plans to deal with the challenge head on, stating “my Government will keep the tariffs on until the Americans show us respect”.
If you have been reading the news this week, there have been some very alarming headlines, with the most recent being US President Donald Trump threatening 200% tariffs on wine and champagne from EU countries. This appears to be tit-for-tat following the EU’s retaliatory action against American whisky, due to come into force on the 1st of April. The economics on tariffs is very simple; as companies raise prices on a product due to higher import taxes (costs), consumers will likely turn to cheaper alternatives or consume less of the product. During Trump’s first term, whisky exports to the EU fell by $142million, and markets have growing concerns that such measures across multiple sectors all at once could push the US into a recession.
US CPI (inflation) figures for February came in at 2.8%, a slight fall from January’s figure of 3% (year-on-year). Shelter (rent) costs rising 0.3% have been a consistent contributor to rising inflation, but airlines fares falling 4% due to consumers cutting back on spending and fuel prices falling 1% due to cooling demand are seemingly consequences of the economic uncertainty. Falling inflation during the turbulence of a trade war pose questions to the US Federal Reserve, which will meet next week to set monetary policy. It may be too soon to see the impacts that the trade war will have on inflation or the labour market. US equity markets reacted positively to the inflation data on the day but are still the worst-performing market for the year. The main US market is down over 10% in sterling terms for 2025 and is now officially in correction territory having dropped 10% from recent highs.
The Bank of Canada met on Wednesday and cut interest rates by 25bps (0.25%) bringing rates down to 2.75%. This is the seventh consecutive interest rate cut; however, Governor Tiff Macklem stated the committee considered a pause. Once again, the impact of tariffs on the economy is a key concern, as there has already been a shift in business and consumer spending patterns. Mr Macklem has not ruled out an unscheduled monetary policy meeting in the case of a severe shock to the economy.
Here in the UK, GDP figures were released this morning and fell -0.1% over the month of January. Market expectations were for slight growth of 0.1% to follow December’s print of 0.4%. Manufacturing output notably grew 0.7% in December but fell -1.1% in the latest print, in addition to a fall in the construction sector after snow and poor weather held back builders. Negative economic growth to begin the year certainly creates a tall task for Chancellor Rachel Reeves as she is set to make a Spring statement later this month. She doubled down on the plan to increase UK defence spending to 2.5% of GDP by 2027, believing it would “give the economy a lift”. The Bank Of England meet next week, but it is expected that the weak growth numbers will not change their plans of a pause in interest rate cuts.
Gold prices hit a historic $3,000 an ounce for the first time as investors continue to flock towards the safe haven asset amid economic uncertainty. Despite weaker inflation in the US and softer GDP data in the UK, government bond yields have surprisingly risen this week. Following Germany’s fiscal spending plan last week, the German equity market continues to perform strongly this year. Eurozone equities are around 13% ahead of US equities in 2025, a huge reversal from the previous two years. As the outperformance prolongs, more and more investors are rotating portfolios, with European equities seeing strong inflows, while US equity inflows appear to have stalled.
The volatility in equity markets currently can be unnerving, however, being diversified in exposure has been a good strategy in 2025. Within portfolios, while US equities have been a detractor, areas such as Europe, Japan, infrastructure and gold have all been strong contributors, meaning portfolios have been insulated from some of the drawdowns seen across US and global indices.
Nathan Amaning, Investment Analyst
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