Market report: Tariff worries and central bank decisions cause jitters
Susannah Streeter, head of money and markets, Hargreaves Lansdown:”Concerns about how Trump’s tariff wars will play out are still causing jitters, even though the door is open to a deal with China, with talks scheduled for this weekend. The FTSE 100 is lower in early trade, after its record run of success, having netted higher closes for 16 sessions in a row. There’s a pause for breath for the Footsie ahead of key interest rate decisions from the Fed and the Bank of England, as investors await the take from central bankers about the current risks to the global economy. The S&P 500 fell back as more US firms revise forecasts or hesitate to deliver guidance given the trade uncertainty, however futures markets indicate a bounce back underlining the continued swings in sentiment.
China is aiming to bolster its resilience and ability to withstand trade turmoil by unveiling a range of stimulus measures. It’s being seen as tactical positioning to try and give its negotiator a firmer hand in discussions with US Treasury Secretary Scott Bessent in Switzerland. China’s central bank has lowered a key interest rate and the amount of cash banks need to hold in reserves has also been cut. The moves are focused on increasing liquidity in the economy, and bolstering domestic demand, to offset the painful impact on exports.
Canada’s new Prime Minister Mark Carney struck a tone of cordiality with an undercurrent of steeliness as he met President Trump at the White House. The clash over Trump’s proposal for Canda to become the 51st state of the US underlined how Trump has upended geopolitical norms. Trump persisted with this dream even though Carney once again said Canada would never be for sale. Trump’s willingness to aim for pie-in-the sky ambitions is doing little to spread reassurance that he’s ready to retract his more radical trade proposals. Stocks are set to continue to oscillate as pessimism and replaces optimism in a nervous cycle until more deals are inked.
The Fed is widely expected to keep rates on hold due to the unpredictability of US trade policy, despite calls from Trump for cuts. The US economy contracted on an annual basis in the first quarter, but it was partly due to erratic buying behaviour, with imports surging as businesses stockpiled in a defensive move to try to minimise the worst of the initial wave of tariffs. Fed policymakers are likely to need more clarity about where tariff policy will land and its impact on employment and inflation before easing policy.
With the UK caught in the downdraft of Trump’s fiery trade policy, Bank of England policymakers look highly likely to cut interest rates. The turmoil Trump has unleashed has increased the odds of an interest rate cut this week dramatically. Financial markets are currently pricing in a 90% chance of a reduction, whereas before Liberation Day it was looking more like 50/50. Growth forecasts have been slashed for the UK and the mighty services sector has contracted for the first time in 18 months, so policymakers look set to be ready with bandages to stop a further seeping away of activity. Lower borrowing costs may help increase business and consumer confidence and encourage more investment and spending.
The UK initially looked like it had got off more lightly in the tariff wars, but 10% blanket tariffs on UK exports to the US will hurt. Car makers and steel producers are facing more onerous hikes. The country is so interlinked with the rest of the world that the expected global downturn will pile on extra pain. There are hopes that a trade deal might come sooner rather than later, maybe even this week, given rumours swirling of significant progress having been made, but it’s far from certain. Although inflation is still significantly above target, deflationary forces are expected to move in. Chinese producers may find that the tariffs will essentially close off the US market, and they’re likely to push an excess of cheaper goods to other markets, including the UK. So, a flagging economy rather than stubborn inflation will be front of mind for policymakers.
Oil prices have continued to rise amid some hopes of a rapprochement with China and the US. There are also signs of weaker production in the United States which has helped Brent Crude, the benchmark, make fresh gains. It’s currently edging towards $63 a barrel. Analysis from Diamondback Energy estimates that the number of rigs operating in the US is expected to be around 10% lower in the second quarter.
Obesity drug maker Novo Nordisk looked like a lean profit machine but its sales are turning flabbier as main rival Eli Lily gains more muscle in the space. Novo has tripped up revealing a 13% sales decline for the first quarter and has downgraded its sales forecast for the year.
With more here’s my colleague Derren Nathan, head of equity research, Hargreaves Lansdown: “Novo Nordisk has lashed out at the controversial US compounding industry in its quarterly update, citing a focus on preventing unlawful formulations of semaglutide, the active ingredient in its weight-loss wonder jab Wegovy. In some cases US compounding pharmacies are allowed to formulate active medical ingredients into non-approved drugs to meet individual requirements or combat shortfalls in supply. Wegovy sales growth in the US was hardly pedestrian,at 39%, but it was international sales that drove most of the 83% uplift, as new markets open up. None of this wasenough to prevent a downgrade to full-year guidance.
News earlier in the year that the FDA has declared the shortage of GLP-1 medicines as over is something of a double-edged sword. There’s a clampdown on compounders, but question marks remain over its enforcement. The end of the shortage also raises questions about the health of US demand. That’s also reflected in Novo’s deal last week with a US healthcare provider to provide Wegovy to patients at a discounted rate of $499. There’s intense competition too from Eli Lilly, both in injectables and in the race to bring an oral alternative to the market. These challenges have been reflected in a 40% decline in the share price over the last six months. Novo remains a key player in the biggest shift in healthcare treatment of our generation. This could mark an attractive entry point for opportunistic investors, but there’s a real job to do to restore market confidence.”
Military contractor BAE Systems is deflecting tariff turmoil and keeping its sights trained on its full year guidance. It’s released an update confirming its trading in line with management expectations which includes a rise in sales of between 7 and 9% and underlying profit expected to increase by between 8 and 10%.
With more here’s Aarin Chiekrie, equity analyst, Hargreaves Lansdown: “BAE Systems continues to march towards its full-year targets, with sales and profits set to grow by at least high single digits this year. The UK’s largest defence company manufactures heavy-duty military equipment like fighter jets, aircraft and submarines. Despite being based in the UK, around half of its sales come from the US, making it the group’s most important region. US military plans call for increased spending, with the aim of bringing that production to domestic shores. The vast majority of equipment that BAE delivers to its US customers is already produced in-country, with a domestic supply chain, meaning that BAE shouldn’t be too affected by US tariffs as they currently stand.
Back on home soil, the UK government has reaffirmed its target to increase defence spending to 2.5% of GDP from 2027. With a number of other NATO members committing to significant increases in their defence budgets too, BAE looks well-positioned to meet this rising demand over the coming years.”