Market moves: the UK avoids the Trump premium for now

It has been a big week for financial markets. Stocks have sold off sharply in the US, the dollar is king, the AI trade is up in the air, and the market is shifting from a risk-positive Trump trade, to a risk negative Trump premium.

Below are our thoughts on how assets could react going forward.

• The Eurostoxx 50 along with other European indices have had a fantastic start to the year, yet more than half of the Europe’s biggest companies are lower on Friday as the market tries to price in the effect of tariffs on European goods. The decline is led by ASML, Kerring, LVMH, SAP and Schneider Electric. Europe’s large and smaller cap companies are extremely exposed to global trading conditions, and both large and small cap stocks are at risk from tariffs hitting the EU in the coming days.
• President Trump has tied tariffs on Canada, China and Mexico on non-trade issues like immigration and drugs. However, this is not the case for the EU. President Trump is using tariffs to try and redress some imbalance that he sees in the relationship between the EU and the US. This focusses on international security and on trade flows. According to US trade data, Germany has the fourth largest trade surplus with the US, Ireland is in 7^th place, largely due to its tax regime, and Italy is 8^th. If Trump wants to address these deficits with Europe, it could take 1, many years of tariffs and 2, economic pain for Europe. At this stage, trade issues between the US and Mexico, China and Canada seem easier to fix. The issues between the US and the EU are thornier, and could take time, and EU economic pain, to fix, which could halt the European stock market rally in the short term.
•  In contrast, the US ran a small  trade surplus with the UK in 2023 it is worth noting that UK figures suggest we have a surplus with the US, due to the differences in how the UK and the US report trade figures. But the point is, the UK has a smaller goods trade surplus with the US compared to elsewhere.
• Combined with Trump’s fondness for the UK, and another invitation for a state visit at Buckingham Palace, this means that the UK is now the golden child of Europe. This is reflected in the UK’s asset prices: the FTSE 100 is higher on Friday as hopes grow for a quick trade deal with the US. The UK is also expected to avoid tariffs, after a successful trip to the US by PM Kier Starmer. The FTSE 350 is also resilient and is rising today, whereas European indices are mostly a seas of red.
• The pound is the most resilient performer vs. the USD so far this week, while UK bonds have underperformed US bonds this week (US Treasury yields have fallen by more than UK Gilt yields), UK Gilts are performing well vs. the rest of Europe.
• There could be more upside to come for UK stocks. The FTSE 100 has some big defense names, and it is low on tech, which is having an existential crisis as the AI trade gets pared back. Thus, for now, the dinosaur index is being given a life raft from the US President, and it may continue to recover as the Trump premium avoids the UK.  
• Interestingly, being close to Trump doesn’t always pay off, so investors in UK assets need to be aware: Tesla’s stock is tumbling and is down by 27% in the past month, even though Elon Musk has an access all areas pass around Trump. Likewise, Trump is also a fan of bitcoin, but its star has also fallen in recent weeks and it is  well below the peak reached in January.