European stocks take a breather, as Davos waits for Trump address

Markets are taking a breather on Thursday, after chasing Trump’s first executive orders since he become President. His AI investment plans car had a huge impact on financial markets this week. Magnificent 7 stocks surged, and the S&P 500 closed just shy of a record high on Wednesday. However, while the US is undoubtedly the focus for markets as we move through January, there are other things to consider, and Europe is also in investors’ sights.

In the UK, there was another blow to sentiment. The latest British Retail Consortium survey found that 48% of respondents expected the economy to get worse in the coming months. This is an increase on the December figure. This suggests that the government’s growth message is still failing to boost consumer sentiment. The UK has a problem, we may be an attractive destination for investment, but this is not feeding through to Main Street. The threat of more tax rises is no doubt keeping a lid on spending plans for the average person in the UK, and this should be remembered by Reeves ahead of her spring statement.

With less than 1 in 6 people in the UK expecting the economy to brighten in the coming months, the gloom that has descended over uk consumers since Labour came to power is adding to America’s exceptionalism. When consumer sentiment is this weak, why would the pound rally?

There is a chance that we have reached peak pessimism in the UK and in Europe, but so far there is no evidence to suggest that these economies will be able to match the rate of growth and productivity as the US. While European markets are hitting record highs, the drivers are emanating from the US, and are not domestically driven. For example, European tech stocks pushed the dax and Eurostoxx indices to record highs this week, due to announcements about AI investment in the US. This helps European stocks, but not necessarily the European economy. Thus, looking forward we could see a disconnect between European stock market returns and the performance of the European economy, with stock markets outperforming even if domestic economic growth remains weak. It also leaves European stocks vulnerable from us economic weakness down the line.

The US will be back in focus on Wednesday as we wait for Donald Trump to address the Davos forum later today. He won’t be there in person, but, as ever with Trump, his speech could be wide ranging and it could have consequences for markets. His address might take aim at Europe for running a surplus with the US. He may also mention his plans for tariffs and give warning that his plans for an America first economic policy will be enacted quickly. We doubt he will say anything that will knock stock market sentiment, however, tariff talk has been dollar positive in recent days, so his comments could have a bigger impact on the FX market.

The dollar faded a move higher on Wednesday and GBP and euro made gains vs the dollar. GBPUSD is hanging on to $1.23 for now, but it could be vulnerable to another leg lower on the back of what Trump has in store for Davos.

The dollar has tended to rally as a safe haven bid, when Trump’s policies have threatened global growth. However, the fact that he has taken a moderate stance towards China so far is limiting dollar upside for now, and has allowed the euro and pound to claw back some recent losses. However, there has been no major breakout for the euro or the pound vs the USD, which suggests that the strong dollar trend is here to stay, even if it is on pause for now.

Lastly, bitcoin continues to struggle as Trump has failed to mention it in his early days as president. It continues to trade above $100k, however, it has backed away from Monday’s record high. Demand is likely to remain strong if Trump does announce a crypto based executive order, for example to allow states greater autonomy to use and accept crypto, or if he sets up a reserve crypto fund. Thus, crypto may be on pause for now, but it could have a strong response when Trump does mention it.