The week ahead: Tariffs, US CPI and BP’s big problem

February has seen risk assets stall so far. Although the Dax and FTSE 100 made fresh record highs last week, gains for European assets were modest, and US equity indices were lower for both blue chips and mid cap stocks. The dollar was mixed, as were commodities, with gold also reaching  a fresh record. The bond market in Europe was mostly flat, with some mild flattening of the US Treasury yield curve. A combination of earnings reports, tariffs and a mixed payrolls report has kept markets and investors on edge as we progress through Q1.

Tarif threats dominate for another week

As we start a new week, there are another round of tariffs for markets to price in. Trump has announced plans to slap 25% tariffs on imports of steel and aluminum from Monday, at the same time as China will place tariffs on $14bn of US goods, in retaliation for the US’s 10% flat tariff on all Chinese imports. While $14bn in trade terms is fairly small, the symbolism will have more impact on market sentiment. It highlights the fact that China and the US could not agree on a plan to move forward without tariffs, and essentially starts a new trade war between the two largest global economies. Hopes that the US could roll back on tariffs like it did with Mexico and Canada were dashed, and the new measures from China will also include export restrictions for rare earth minerals, which are vital to produce smart phones, some chips, batteries and infrastructure for renewable technology, which could weigh on tech stocks at the start of this week.

Market reacts as tariffs encroach on more sectors

The initial market reaction to this news has been faded. Bitcoin initially fell sharply and was lower by more than $1300 on the news, since then it has turned around and is higher by $1844. Bitcoin has been following the stock market closely in recent weeks, especially tech and this could signal that the markets are more resilient to Trump’s tariff threats, or at least have got used to trading through them. The FX market has been extremely sensitive to tariff threats, and the dollar rallied at the start of the new week, as tariffs lead to a rush into the buck. EUR/USD and GBP/USD fell on the news of new tariffs on steel and aluminum, but they have since clawed back some of their losses vs. the USD. The yen has also fallen vs. the USD, as Japanese steel exports could come under threat due to the tariffs, although the Nikkei is eking out a small gain so far.  Interestingly, a strong dollar has come up on a significant number of earnings calls as a threat to future profitability, thus a stronger dollar at the start of this week could compound problems for US equities down the line.

The early price action is a sign that the market could be willing to look through politics, at least in the short term. President Trump takes an active stance towards the US economy, and the fact that global equity indices are higher at the start of the week, could be a sign of tariff fatigue.

Interestingly, Trump announced his latest tariffs late on Sunday, which suggests that he is not too worried about the market reaction. Typically, Trump has announced tariffs earlier in the weekend, as if he was watching the reaction and to give himself time to back track before stocks or risk assets sold off too sharply. This may suggest that Trump is determined to impose tariffs on these industrial metals. These tariffs are targeting specific products, rather than individual countries, which makes it hard for any negotiations to take place. We think that this move could boost the gold price, as it may lead to a further flurry of demand to bring gold on shore to the US, in case Trump imposes tariffs on precious metals. The question for investors is whether gold will reach the psychologically significant $3,000 level on the back of ever-growing tariff levies. So far, the gold price is higher by $25  early on Monday.

Is Europe next?

The US President also primed the market for more ‘reciprocal’ tariffs later this week, i.e., the US will start to apply tariffs on foreign  goods, if a similar tariff is applied to US exports. This could also reference countries with large trade surpluses with the US. We think that there is a high chance that European goods will face tariffs this week, which may limit sentiment towards European stocks after a blistering start to the year. The Dax is higher by nearly 10%, the Cac is higher by 8% and the FTSE 100 is higher by more than 6%. Europe’s car industry may be at risk at the start of the week, particularly Porsche. It has outperformed other global car makers, however, if Trump does target Europe this week, then he may focus on the auto sector and pharma first. A blanket tariff on European imports to the US could be devastating to European growth and would likely trigger a sizable market reaction. We will have to see if this would cause the European leadership to acquiesce to Donald Trump’s demands, so far, they have sounded combative and threatened to slap the US with retaliatory tariffs, which may not bode well.

BP comes under Elliott’s glare

Elsewhere, BP is expected to react to news that activist investor Elliott has built a significant stake in the company. This is not the first time that an activist investor has targeted BP, Bluebell Capital Partners started to get vocal about BPs under performance last year, and it also called for heads to roll, including the chairman. Like Bluebell, Elliott also wants BP to ditch its plans to reduce its fossil fuel reduction plans. The difference this time is that Elliott is better known than Bluebell and has a track record of forcing through the corporate changes that it wants. We don’t know how big its stake is, or exactly what its plans are for BP: will it try to break the company up, or could it try to force a sale of the company? BP’s shares have risen by 10% so far this year, although they remain well below the highs from last April. This news may lead to a slight uplift at the start of the week. As mentioned, we do not think that Elliott has enough of a stake in BP yet to force a sale of the company, however, if there was a firm offer on the table for BP in the coming weeks, then the stock price could take off, in our view.

BP releases Q4 results on Tuesday. The company has already signaled that these will be weak, and that share buybacks could be cut, the focus could be on how the executive team handles the earnings call now that Elliott is on the prowl. The CEO will also release a delayed strategy update on Feb 26th. The fact this was delayed already leaves a bad taste in the mouth of investors, but now there is even more resting on the new strategy. The question for investors, is Murray Auchincloss up to the task? If not, then the share price could fall, allowing Elliott to build an even bigger stake in the UK oil giant. This is an important few weeks for BP.

Below, we look at key economic events to watch in the week ahead:

US CPI

All eyes will be on Tuesday’s CPI report to see how inflation fared in January, after a larger than expected jump in US wage data. Average annual wage growth rose to 4.1% YoY from 3.9% in December. The market is expecting headline CPI to remain steady at 2.9%, and for core price growth to fall a notch to 3.1% from 3.2%. There are obvious risks to the upside for January CPI due to the rise in wage growth and increases in the price of some key commodities like Nat Gas, heating oil and gasoline prices last month. The fires in Los Angeles may have put upward pressure on rental costs, which may impact the shelter index.

However, if this data does come in line with expectations, then investors may look through it, since it is the last inflation print before President Trump’s tariffs came into force. These new levies are expected to weigh on inflation, especially since the 10% tariff on Chinese imports has come into effect, even though there have been delays on tariffs for Canada and Mexico. .

This is having a double impact on the FX market. The US dollar is moving on the back of haven flow driven by tariff fears and geopolitical trade wars, as well as concerns that tariffs will drive up inflation and make it hard for the Fed to speed up their rate cutting cycle. The Fed is expected to make just over one rate cut this year, and interest rate expectations have been scaled back since Friday’s payrolls report. Stronger CPI could see this trend continue, which may add to downward pressure on global risk assets, since the Fed is still the central banker to the world. We will also be watching Fed chairman Powell’s semi annual testimony to the US Congress. He is likely to face a tough grilling, especially from the Republicans. However, we doubt that he will give too much away, as the Fed chair has said they need to see the impact of President Trump’s economic policies before deciding what they mean for monetary policy.

UK GDP

The UK is expected to report that GDP contracted by 0.1% last quarter, when it is released on Thursday. A contraction is highly anticipated after a spate of weaker than expected economic data. We expect that service sector growth slowed sharply, while manufacturing and industrial production are expected to have picked up slightly. The trouble is, the service sector needs to do the heavy lifting for the UK due to its large weighting in the UK economy, so if it is struggling then a recession remains on the cards.

The weak growth has continued into 2025, and economic data has surprised to the downside. The BOE slashed their growth forecast in half at their meeting last week, which was more than expected. The deterioration in the economic data in 2025 could mean that the economy takes longer to recover than some expect. The BOE expects the UK to pick up in the second half of this year, and we doubt that this data will change their view.

This will heap pressure on Chancellor Rachel Reeves, as we get closer to her Spring Statement next month. The stagnation in the economy could lead to larger spending cuts that may be included in her interim update. If she wanted to boost growth, she could cut taxes and reverse some of the tax hikes included in the October Budget. This may boost confidence; however, we don’t think her political base would allow her to take this step. Thus, the UK will have to magically grow out of somewhere if it wants to get out of stagflation territory anytime soon.

The risk for financial markets is that a sharper than expected decline in GDP could trigger another sell off in UK bonds, aggravating growth even more as higher interest payments on national debt may lead to lower levels  of government consumption. UK bond yields have stabilized so far this year, and the 2-year yield is lower by 20bps. If we see bond vigilantes come back and target the UK, this could add to sterling’s woes this week and take GBP/USD back towards the $1.20 level.