MARKER UNMOVED BY US TARIFFS THREATS BUT POTENTIAL PEACE IN UKRAINE COOLS ENERGY PRICES

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Data Sourced from FE Analytics, and Bloomberg Finance LP

MARKETS UNMOVED BY US TARIFFS THREATS BUT POTENTIAL PEACE IN UKRAINE COOLS ENERGY PRICES

This week the Donald Trump effect was evident in markets again. Trump kicked off with 25% tariffs on steel and aluminium imports and ended the week with a promise of reciprocal trade tariffs on all US trading partners. The reciprocal plan also includes local taxes such as VAT and other non-tariff barriers such regulatory standards. The potential for disruption to trade is significant but, aside from the dollar extending its recent decline and a slight rise in the gold price, markets remained calm, assessing the potential impact, as well as the odds of implementation.

The Trump effect was also seen in geopolitics as he sidelined Europe to directly broker peace in Ukraine with Russia. The start of negotiations raise serious political problems for Ukraine and the EU. Without US military and financial support, Ukraine may be unable to refuse any US-Russia brokered deal. If Ukraine is unwilling to take the deal on offer, the EU must decide if it is able and willing to replace the significant US support. Markets have reacted more positively. European equities gained, the price of European and UK natural gas fell and oil continued its recent decline.

US: UNEXPECTED RISE IN INFLATION PUSHES UP TREASURY YIELDS

A surprise increase in US inflation spurred more volatility in government bonds. Headline inflation edged up to 3% and core inflation (excluding more volatile food and fuel costs) also increased. Headline inflation was expected to be unchanged and core inflation was predicted to slow. During an appearance before the US Senate, Federal Reserve chair Jerome Powell said as the economy is strong there is no hurry to reduce rates. US government bonds dropped, driving up yields, as investors see no potential for further rate cuts this year, however, US treasuries subsequently rallied. UK government bonds also fell following the US inflation update but most of the decline was reversed.

During Powell’s Senate hearing, he was keen to avoid giving an opinion on whether President Trump’s tariffs will be inflationary. At the start of the week Trump announced 25% tariffs on all steel and aluminium imports in addition to the tariffs on imports from Mexico, Canda and China already proposed, with the new tariffs due to take effect from early March.

TECH: CHINESE TECH RALLY AS INVESTORS LOOK TO AI

Chinese tech stocks have entered a bull market due to investor enthusiasm for artificial intelligence. The development of DeepSeek’s cheap AI model has helped the Hang Seng Tech index, tracking its top 30 listed tech firms, to surge 25% from its January 2025 low, outpacing the Nasdaq 100’s 4.4% increase. Foreign investors are reappraising Chinese tech companies which were perceived to be lagging in innovation and well behind on AI. The renewed interest has sent stocks including Alibaba, Xiaomi, Baidu, and BYD soaring between 13% and 43% in the past month. Some investors are betting under-appreciated Chinese tech will widen access and adoption of AI in consumer facing products. The broader Hang Seng index is up 15% in the same period.

In contrast, the US tech sector is taking a breather from its two-year rally, with the Magnificent Seven declining 0.5% this month. The release of DeepSeek’s AI model led to a sell-off in US tech stocks, including Nvidia’s record one-day $600bn loss in market value.

ENERGY: GAS SPIKES IN EUROPE AS OIL MAJRS PIVOIT TO OIL

BP promised a strategy reset and halved bonuses as full year profits fell 35.5% to $8.9bn, as its refining and trading businesses fell to a loss. Shell’s recently reported earnings and profits fell due to thinner margins. Both companies have also been reversing their recent push into renewable energy. Despite the poor update BP’s shares have remained steady this week following US hedge fund Elliot Management building a $4bn stake in the company. Elliot is now BP’s third largest shareholder and it wants to force it to divest from renewable energy and focus back on petroleum. Vitol, the world’s largest independent energy trader, forecasts global oil demand will remain unchanged until 2040.

BP has also raised its demand forecast, though it’s outlook is not as bullish. Meanwhile European gas prices hit a two-year high as cold weather halved storage levels and created competition with Asia over LNG, which provides a third of the EU’s gas. But the potential end to war in Ukraine saw prices fall as Russian gas supplies may return to Europe.

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