UK markets rose this week, with the FTSE 100 Index gaining 1.33% to trade at 8,780 points at the time of writing. Prime Minister Sir Keir Starmer announced this week that UK spending on defence will rise to 2.5% of GDP by 2027 from 2.3% currently and reach 3% in the longer term. He said this would be funded by reducing the UK’s ringfenced aid budget from 0.5% of gross national income to 0.3% over the next two years.
Pressure has ratcheted up in recent weeks after US President Donald Trump set out his intention to secure a rapid ceasefire in the Ukraine war, and cast doubt over his appetite to continue supplying significant military support to Europe. The increase will cost between £5 billion and £6 billion a year. The announcement came before the UK Prime Minister headed to the White House for a press conference with Donald Trump on Thursday, where he began talks in an attempt to secure a trade deal with the US that could spare Britain from tariffs.
Trump suggested that the UK and the US “could very well end up with a real trade deal where the tariffs wouldn’t be necessary”. His remarks came a day after he threatened the EU with 25% duties on its exports, and hours after he said he would press ahead with tariffs on Mexico and Canada and boost his planned levy on China. British officials said the two sides were aiming for a phased economic and tech agreement that stopped short of a full free trade agreement. However, attempts to strike US-UK trade deals have foundered in the past over British refusals to accept certain American farm products. The idea of such a trade pact was a central argument for pro-Brexit campaigners almost a decade ago and would be a real bonus for the UK if it could avoid the imposition of Trump tariffs.
Dave Ramsden, a Deputy Governor of the Bank of England and senior rate setter said that UK inflation risks have increased due to stronger than expected pay growth, as he emphasised the need to proceed with gradual monetary policy easing. Pay growth has overshot the Bank of England’s expectations and the central bank predicts consumer price inflation will accelerate to 3.7% later this year, complicating plans for lower interest rates.
Commodity markets
In the commodity markets, Brent crude futures traded around $73 per barrel on Friday and are set for their first monthly drop since November, as uncertainty over global economic growth outweighed supply concerns. A long list of factors including economic slowdown fears in the US, tariffs, OPEC+ plans to increase supply in April and hopes of peace in Ukraine are curbing investors’ risk appetite and depressing prices.
Nevertheless, supply concerns resurfaced on Thursday after Donald Trump revoked a license granted to US oil major Chevron to operate in Venezuela. OPEC+ is debating whether to raise oil output in April as planned or freeze it, as its members struggle to read the global supply picture because of fresh US sanctions on Venezuela, Iran and Russia, eight OPEC+ sources said.
Gold prices traded around $2,860 an ounce on Friday, dropping to their lowest level in two weeks as the US dollar strengthened with investors waiting for key inflation data that could shed light on the Federal Reserve’s monetary policy path.
Equity markets
US equity futures rose on Friday after the major averages declined sharply on Thursday, dragged down by a sell-off in technology stocks. In Thursday’s regular trading session, the Dow Jones Industrial Average lost 0.45%, the S&P 500 dropped 1.59%, whilst the Nasdaq Composite sank 2.78%.
US President Donald Trump said on Thursday he would impose an additional 10% tariff on imports from China on March 4th, on top of the 10% tariffs he imposed this month. He will also press ahead with 25% levies on Mexico and Canada from next week, raising the chances of a global trade war that risks inflicting significant damage on the global economy. The potential damage would be deepened if Trump decides to press ahead with 25% tariffs on products from the European Union, which he threatened on Wednesday.
Over the past month, Beijing has been trying to ascertain whether Trump wants to negotiate a narrow trade deal or a more comprehensive agreement with China. Chinese officials and government advisers have informally signalled that Beijing would be willing to purchase more US products to cut the trade deficit between the two countries. They have also said Chinese companies could invest in the US to create as many as 500,000 jobs.
The US economy expanded at an annualised 2.3% in Q4 2024, the slowest growth in three quarters, down from 3.1% in Q3 and in line with the advanced estimate. Personal consumption remained the main driver of growth, increasing by 4.2%, the most since Q1 2023, also in line with the advanced estimate. Investors are now awaiting the upcoming personal consumption expenditures price index report, the Federal Reserve’s preferred gauge of inflation. The index is expected to have increased by 0.3% month-over-month, slightly above the 0.2% gain in the previous month. On a year-over-year basis, headline personal consumption expenditure inflation is anticipated to ease to 2.5% from 2.6%, marking its first slowdown in four months. The Federal Reserve revised its economic projections upward in December, raising its 2025 personal consumption expenditures inflation forecast to 2.5% from 2.1%, reflecting a more persistent inflation outlook than previously estimated in September.
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