Market snapshot: TACO, NATO and mojo 

Markets rallied as the latest geopolitical threat receded, although the gains were limited by what may come next in the US President’s game of political poker.

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In a much-awaited speech in Davos, the President ruled out both military intervention in Greenland as well as the tariffs he had threatened to impose on eight European countries who had opposed his wishes. By implication, the NATO alliance remains intact, while for investors the return of the TACO trade sent stocks higher.

However, gold and silver held firm despite the relief rally in equities, with the President’s tendency to shoot from the hip still unsettling sentiment. There were reportedly increasing signs of a fractious relationship between the US and Europe, with lawmakers having suspended the EU’s trade deal with the US earlier in the day, while the Prime Minister of Canada claimed that the world was “in the midst of a rupture”.

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As such, investors are yet to fully regain their mojo, even in the US where the main indices remain down for the week despite the widespread rises yesterday. Domestically, investors are also dealing with a raft of corporate earnings, with important economic releases also coming this week in the form of GDP and PCE (Personal Consumption Expenditures index), the Federal Reserve’s preferred measure of inflation.

The slightly changing attitude to risk has also resulted in the continuation of the rotation trade as investors seek to avoid having all of their eggs in the AI basket. So far this year, the Dow Jones has gained 2%, while the benchmark S&P500 is ahead by just 0.5%, with the Nasdaq having declined by a marginal 0.1%. 

Currently in the vanguard are smaller cap stocks, which have been boosted both by the rotation trade as well as the prospect of lowering interest rates over the next few months, which is seen as particularly beneficial to companies looking to borrow to grow their business. A rise in the year to date of 8% for the Russell 2000 index has so far dwarfed the progress of the main indices.

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In Asia, Japan saw some relief on two fronts. The measured bounce back in technology shares elsewhere lifted the likes of Softbank, which rose by 11%, with the Nikkei 225 posting a near 2% gain. Meanwhile, some of the pressure on the bond market eased given the welcome geopolitical developments from Davos. Investors are continuing to deal with the implications of a snap election and a new regime which could increase the country’s debt burden by implementing both a spending spree as well as a round of tax rate cuts.

The relief rally washed over to UK shores, where the main indices posted decent gains as a result of the potential lessening of tensions. For the FTSE100 this resulted in some inevitable weakness in defence shares, with BAE Systems (LSE:BA.) and Babcock International Group (LSE:BAB) slightly back-pedalling.

Gold and silver prices, while holding marginally firm, led to some rare weakness in the shares of Endeavour Mining (LSE:EDV) and Fresnillo (LSE:FRES), doing little to dent their extraordinary progress over the last year, where gains of 171% and 483% respectively are still in place. Beazley (LSE:BEZ) shares retreated by more than 4% after announcing that it had rejected the takeover proposal by Zurich Insurance.

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However, these dips were more than offset by a broad markup across sectors which incorporated stocks which could otherwise have been affected by the imposition of new tariffs. In addition, the banks and airlines attracted some buying interest as investors anticipated something of a return to normality after the recent noise. The gains for the main indices leaves the FTSE100 and FTSE250 ahead by 2.8% and 3.7% respectively in the year to date, consolidating the new-found interest in the UK market as a whole.