Jump Start - US economic momentum, rate cuts & gold
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Welcome to this week's Jumpstart, your quick guide to the key market events this week in just under five minutes. It's Monday, the 17th of February. I'm Belinda Peters from the UBS Chief Investment Office in Zurich. Last week, U.S. President Trump made headlines again by signing a directive on reciprocal tariffs. Will these new tariff policies derail economic momentum?

Meanwhile, gold continued to hit record highs. Is there still further room to rally? And finally, the global easing cycle gains momentum. Will it persist further into 2025?

Last Thursday, U.S. President Trump made headlines by signing a directive on reciprocal tariffs without imposing immediate measures. This decision provided relief to investors leaning to recovery in both bonds and equities after a sell-off the previous day triggered by unexpectedly high U.S. inflation data. Although the delay in implementation limits immediate market impact, the risk of retaliation persists.

In our view, we expect targeted measures and negotiation-driven outcomes rather than prolonged blanket tariffs. Markets will now be closely watching for any shifts towards full enforcement as widespread tariff implementation could elevate inflation risks, pressure equities, and potentially impact, though not derail, U.S. economic growth.

Against this backdrop, we recommend that investors focus on portfolio diversification and hedging strategies, emphasizing capital preservations in equities, high-grade bonds, and strategic currency positions.

Gold's rally has extended into February, hitting new record highs last week. It's now up more than 10% since the start of the year after gaining more than 25% last year. The recent acceleration in the rally has been primarily driven by concerns over an escalating global trade war initiated by US President Donald Trump. As investors ponder the sustainability of this upward trend, we believe there is still room for further growth.

Geopolitical uncertainty, including ongoing tariff issues and tensions in the Middle East, continue to enhance gold's appeal as a safe haven asset. Additionally, anticipated Federal Reserve rate cuts are expected to support gold prices by lowering the opportunity cost of holding non-interest-bearing assets like gold. Strong demand from central banks further strengthened this outlook. As a result, we have revised our gold price forecast to $3,000 per ounce over the next 12 months.

In this environment, we maintain that gold serves as an effective portfolio hedge and diversifier. We think an allocation of approximately 5% within a USD balanced portfolio is prudent to maximize its benefits and provide a buffer against market volatility and geopolitical risks.

The global easing cycle continues to gain traction with the European Central Bank and the Bank of England both reducing rates by 25 basis points to 2.75% and 4.5% respectively in January. This week, the Reserve Bank of Australia and the Reserve Bank of New Zealand are expected to follow suit.

Investors are particularly focused on the Reserve Bank of Australia, which hasn't adjusted rates in over a year and is anticipated to deliver a 25 basis point cut at this week's meeting, bringing the current rate down to 4.2%. Meanwhile, the Reserve Bank of New Zealand is expected to make a more substantial move, cutting rates by 50 basis points due to easing inflation pressures and contracting economic activity.

In our view, these moves indicate that the broader rate-cutting cycle is still well underway, prompting investors to put cash to work by deploying it into high-quality fixed income or equity income strategies to enhance portfolio diversification and secure more stable income streams. So that's it, you're a jumpstart on Circle One. I'm Belinda Peters from the UBS Chief Investment Office in Zurich. If you have any questions, please reach out to your UBS representative and have a great start to your week.

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