Stock investors flee emerging markets as Trump threatens tariffs

Today’s agenda: Israel-Hamas deal; South Korea’s president arrested; SEC sues Musk; gilt investors warn UK tax rises needed; and the growth gap left by falling birth rates

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Good morning. We start in emerging markets, where stocks have been pummeled as investors prepare for Donald Trump’s proposed tariffs.

What’s the scale of the slide? MSCI’s emerging markets index, which tracks nearly $7.6tn in stocks across China, India, Brazil, South Africa and other markets, is down more than 10 per cent since hitting a two-and-a-half-year high on October 2. Developed market stocks are roughly flat over that period.

Chinese stocks, which make up the largest share of the index, have dropped 15 per cent since October 2 on concerns about the health of the country’s economy. India and South Korea, two other emerging market heavyweights, have also sustained steep losses in recent months.

Why are investors pulling out? Investors are betting that inflationary policies such as tariffs and tax cuts under Trump, on top of an already buoyant economy, will force the Federal Reserve to keep interest rates elevated for much longer than previously anticipated. US government bond yields have shot higher in recent weeks as traders reassess their outlook for inflation. We have more on the shift away from emerging markets stocks here.

We have a busy day ahead with data releases and Wall Street earnings:

• Israel-Hamas war: Both sides are at the closest they have ever been to agreeing a ceasefire and hostage deal, officials have said. US secretary of state Antony Blinken said it “could come at any time”.

• Economic data: The US, UK and France report December consumer price inflation, while Germany will have 2024 GDP estimates. The Federal Reserve publishes its Beige Book on economic conditions, while Opec and the IEA have their monthly oil market reports.

• Trump’s picks: US lawmakers will grill attorney-general nominee Pam Bondi today after Pete Hegseth neared confirmation as US defence secretary following a testy Senate hearing.

• Companies: BlackRock and JPMorgan Chase report fourth-quarter earnings after senior leadership movements this week, as will Citigroup and Goldman Sachs, whose CEO David Solomon said yesterday the US economy was in “a fragile place”.

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Five more top stories

1. South Korea’s impeached President Yoon Suk Yeol was arrested this morning following a predawn raid by authorities on his fortified hilltop compound. Yoon, whose failed bid at martial law plunged the country into turmoil last month, was detained after a six-hour stand-off between law enforcement and his security detail. More details on the arrest here.

2. Investors have poured record amounts of money into a fund that spreads its assets equally across the S&P 500 index as concerns mount that Wall Street’s returns have become overly reliant on a handful of technology giants. After underperforming the S&P for years, the Invesco S&P 500 Equal Weight exchange traded fund took in about $14.4bn in the second half of last year.

3. Exclusive: Saudi Aramco plans to expand its investments in lithium production in the race to build a supply chain for the metal vital for batteries to power electric cars. The world’s largest oil company is expected to announce the expansion today as part of its moves to diversify.

4. US securities regulators have sued Elon Musk for allegedly failing to make timely disclosures on his purchases of Twitter shares in 2022, helping him achieve a discount of at least $150mn on his additional stock acquisitions. Here’s more on the Securities and Exchange Commission’s move.

5. Gilt investors warn that the UK government may need to increase taxes further if it is to retain credibility with the bond market after its borrowing costs rose to their highest since the financial crisis. One analyst said: “Pledges of spending restraint alone may not be sufficient to convince the markets.”

• Bond vigilantes: For the UK, supposedly the main victim of bond traders’ ire, it remains very hard to argue that anything meaningful has changed, writes Katie Martin.

The Big Read

China’s unprecedented industrialisation and urbanisation drove a huge commodities supercycle. But that demand for steel and iron ore, which started to wane during the Covid-19 pandemic, has finally peaked. The industry hopes the energy transition will spark a new boom, but it will be shaped by geopolitical competition.

We’re also reading . . . 

• Greenland: The country’s mining minister told the Financial Times that Trump’s proposal to buy the Arctic territory could be “devastating” for its minerals pitch to global investors.

• California fires: After strikes and the pandemic, Hollywood’s studios had hoped 2025 would mark a rebound — until the fires started.

• Climate ‘whiplash’: We are mounting 20th-century responses to 21st-century weather, writes Anjana Ahuja.

• BP: Murray Auchincloss promised he knew “exactly what we need to do” to grow the UK oil major when he took charge a year ago. It hasn’t worked.

Chart of the day

Many of the world’s richest economies will need to at least double productivity growth to maintain historical improvements in living standards amid sharp falls in their birth rates, a McKinsey report has found.

Take a break from the news . . . 

Paris Déco Off, the citywide fabric and furnishings festival, starts today. Here’s where to go for inspiration and new unveilings.