Client Update - 9th May 2025

Yesterday the Bank of England announced that they would cut UK interest rates by 0.25% to 4.25%. This was not the only good news for the UK, as US President Donald Trump announced a softening of reciprocal tariffs with the UK, especially for car manufacturers and steel imports, that sees a major step back from the brink of 25% tariffs announced last month.

Although the scope of the US-UK deal is limited and many of the details have to be ironed out, this is still a step in the right direction and investment markets appreciated the good news. UK and US stocks rose after the announcement, with investors encouraged by the prospect of further deals — including with China — to limit the damage of the levies that have choked trade.

British exports of steel and aluminium would now be zero-rated for tariffs, according to the UK government, while the first 100,000 British cars sold in the US annually - the vast majority of the total of 120,000 - would be subject to a reduced 10 per cent levy. “This historic deal delivers for British business and British workers, protecting thousands of British jobs in key sectors including car manufacturing and steel,” reported UK Prime Minister Sir Keir Starmer. In exchange, the UK will offer US farmers and ranchers improved market access through a lower-tariff quota system, but without altering its food standards, paving the way for some beef imports. The UK will remove its tariff on US ethanol, used to produce beer.

These two pieces of news gave further support to a market recovery, and it was also interesting to hear this week that US companies have paused spending for growth and are instead planning to buy back a record $500bn of their own shares. This came as the US Federal Reserve (Fed) took a different direction to the Bank of England and announced no change to interest rates this week, as it awaits the impact of the tariffs. It is expected that as supplies start to run low in the US due to the lack of products now being imported onto its shores, that inflationary pressures will start to rise as this lack of supply drives prices higher. The Fed do not want to cut rates until they understand more about the tariff impact on inflation, and subsequently employment. If imports are falling, dockworkers jobs are under threat, that then feeds through to transport companies that will have nothing to ship around the US, and on it goes. Quite how the US consumer will cope with this price shock and possible rise in unemployment will remain to be seen, but I would assume that Trump is going to have to start talking up his tax cuts to ease consumer angst.

Earlier this week, news focussed on companies listed on the blue-chip S&P 500 index that said that they expect to repurchase another $192bn of their stock over the coming months, the highest figure in data going back to 1995, according to Deutsche Bank. The tally of announced buybacks over the past three months has now risen to $518bn — the biggest rolling three-month sum on record, the bank said.

The rush of repurchases comes as a, better than forecast, start to earnings season leaves US companies flush with cash. With corporate outlooks clouded by uncertainty over trade tariffs, many have been attracted by their own share prices that, despite a recent rebound, are still lower than at the beginning of the year.

Rising share buybacks underline that global tariff uncertainty is getting in the way of planning for operational investment. That will have growth implications further down the line. Buybacks can be an attractive option for companies if they believe a market sell-off has left their stock undervalued. Repurchases boost profitability on an earnings per share basis — a figure watched by many Wall Street analysts — by lowering the number of shares in circulation thus increasing the earnings on those remaining. Strategists say stronger than anticipated first-quarter earnings have helped drive the buyback boom. S&P 500 companies so far have beaten expected earnings per share by 7.8%, according to JPMorgan, “well above” the bank’s estimate of a 4 or 5% surprise. More good news.

Back at home, Britain has continued to work on trade negotiations with countries other than the US and Tuesday’s news focussed on India when it was announced that Britain and India have struck a “landmark” trade deal that included concessions to UK employment markets in return for big cuts to Indian tariffs on UK exports of whisky and cars. The deal will exempt the UK operations of Indian employers from paying national insurance on Indian staff relocating to the UK for up to three years, making it cheaper to move people to Britain than previously.

The Labour party immediately faced domestic criticism over the national insurance move, just days after the anti-immigration Reform UK party swept local elections in England. Reform leader Nigel Farage claimed that UK Prime Minister Sir Keir Starmer had “betrayed working Britain.” I gather India pushed hard during the three-year long negotiations for the “Double Contribution Convention,” which will give Indian employers in the UK relief from Britain’s 15 per cent national insurance levy paid by companies. The deal to avoid double taxation also covers national insurance contributions paid by employees. In return, India has agreed to cut whisky and gin tariffs, which will be halved from 150 per cent to 75 per cent before falling to 40 per cent by the tenth year of the deal. Car tariffs will fall from more than 100 per cent to 10 per cent, subject to a quota. The UK government estimates the deal would involve India cutting tariffs worth more than £400mn a year when the agreement came into force, rising to about £900mn after 10 years. It added that it expected the deal to increase bilateral trade by £25.5bn and UK GDP by £4.8bn in the long run.

As markets continue to climb the wall of worry, green shoots are emerging and if Trump continues to step back from the reciprocal tariffs (China and the US meet this week) and starts talking up tax cuts and deregulation, then hopefully April’s market turmoil will be a distant memory and we can enjoy our summer a little more. Do have a good weekend.