U.S. policies boosted European equities
Europe is gearing up for a significant defence spending boost. The push came amid renewed U.S. pressure to resolve the Ukraine conflict, as well as comments from Vice-President JD Vance that rattled long-standing European alliances. Defence stocks surged, with Rheinmetall hitting new highs before giving back some of the gains during the week. All of this has continued to fuel a massive rally in European stocks, with most major indices in the Old Continent up over 10% year-to-date; a huge start to the year. Adding to market optimism, President Xi Jinping’s meeting with business leaders, including Jack Ma, signalled a potential thaw in China’s regulatory stance, boosting sentiment for European exporters.
Meanwhile, the broader market faced headwinds from mixed earnings results and renewed concerns over President Trump’s tariff policies. A wave of corporate reports added to uncertainty, with Walmart tumbling almost 6% after issuing a weaker-than-expected profit forecast, citing a challenging economic outlook. Retail stocks struggled in sympathy, compounding worries over trade tensions and shifting global economic policy.
Gold extended its relentless run, setting a new record, as investors sought safety in the face of rising geopolitical risks and economic uncertainty. Treasury yields and the dollar dipped, after the U.S. Federal Reserve’s (the Fed) latest meeting minutes revealed growing caution among policymakers. Officials signalled that while progress has been made on inflation, they need more evidence before committing to further rate cuts. The Fed also acknowledged that Trump’s proposed tariffs and mass deportations could add inflationary pressure. However, the Fed also hinted that it’s considering slowing the pace at which it reduces the holdings that were added during the pandemic, in order to avoid stressing the economy. This was appreciated by the markets.
All the uncertainty and the pace of policy announcements from the Trump administration are keeping the Fed in a wait-and-see mode for now. On a side note, these developments are weakening the U.S. dollar, which by extension are sending the Canadian dollar higher. We’re now back to the levels seen in mid-December 2024.
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