Top stories
- Prime Minister Sanae Takaichi’s Liberal Democratic Party (LDP) along with coalition partner Japan Innovation Party won a ‘supermajority’ in Japan’s election, with the LDP taking 316 of the 465 seats in the House of Representatives and a further 36 for the Japan Innovation Party. The majority of over two thirds will give the LDP strong control of the lower house and the ability to overrule the less powerful upper chamber, where the LDP lacks a majority. Takaichi said that the LDP had fought the election on a series of major policy shifts, especially on the economy and tax, and “if we have won the public’s support, then we truly must tackle these issues with all our strength”. Japanese stocks jumped to all-time highs on the election outcome.
- President Zelensky is said to be planning elections in Ukraine along with a vote on a peace deal, after the Trump administration pressured Kyiv to hold both votes by 15 May or risk losing proposed US security guarantees. The US plan involves having all documents signed by the close of June to end Europe’s largest conflict since WWII. Zelensky said “they say they want to do everything by June…so that the war ends” citing the White House’s desire to shift focus to the midterm elections in November. The timetable assumes that progress can be made towards a peace deal with Russian President Vladimir Putin. Russia and Ukraine’s position on territory, and the surrender of land not occupied by Russia in the Donbas region, remain a key hurdle for peace talks.
- French President Emmanuel Macron warned that the EU should not be lulled into a false sense of security that tensions with the US over Greenland, technology and trade are over, calling on the economic bloc to embark on a “economic revolution” to become a true global power. Macron pressed fellow EU leaders at a summit this week on competitiveness to capitalise on what he called “the Greenland moment” to recognise they were under threat, to move ahead quickly with economic reforms and reduce dependence on the US and China. Macron said “we have the Chinese tsunami on the trade front, and we have minute-by-minute instability on the American side. These two crises amount to a profound shock –a rupture for Europeans.” Macron added that Europe was now dealing with a US administration that was “openly anti-European”, shows “contempt” for the EU and “wishes its dismemberment”. The Munich Security Conference starts today; last year’s event proved to be a catalyst for Europe in terms of a realisation that the transatlantic alliance would be seen very differently under the Trump administration. Chair of the Conference Wolfgang Ischinger, who is a former German ambassador to the US, said in the preview to the conference that the world has now entered a period of “wrecking ball politics”.
By the numbers
- 0.1% – UK Q4 GDP, which was weaker than expected. Government spending was the main driver of growth, up 0.4% while consumer spending was soft at 0.2%. A wider trade deficit also weighed on the figures. Construction was weak, shrinking 2.1% in the biggest quarterly contraction in four years. For the full year, the UK economy grew by 1.3%, up from 1.1% in 2024. The Bank of England downgraded their forecast for 2026 from 1.2% to 0.9%.
- 130,000 – the number of jobs created in the US in January, significantly higher than expected. The US unemployment rate eased to 4.3% from 4.4%. These headline numbers suggest the US labour market is still in reasonable shape though historical revisions highlight the pace of hiring has slowed. Historical revisions for 2025 wiped out all of the job gains in sectors other than government, leisure/hospitality and healthcare over the past three years and suggests sectors including retail, construction, finance, manufacturing, and business services have failed to generate any new employment. Job gains for 2025 with the revised data averaged just 15,000/month last year, compared to the initially reported 49,000/month.
Market movers
The US economy looks to be in a reasonably ‘goldilocks’ situation right now. Economic growth is reasonable and iset to be boosted by fiscal spending, employment has softened but is holding up reasonably well, inflation is on a gradual easing path and the Fed is expected to cut interest rates further. So why are US equities suddenly seeing such volatility? While US companies are generally seeing a strong round of quarterly earnings, levels of capital expenditure among major technology firms is causing concern over whether this level of investment can generate future returns. Meanwhile, worries over the potential disruption to business models from artificial intelligence (AI) has impacted many sectors over recent weeks, from legal services to wealth management and trucking and logistics firms. The AI theme continues to rapidly evolve and as we saw in the 1990s, rapid changes in technology and perceptions of where it will positively and negatively impact will cause both sector specific and more broad market volatility, as investors attempt to identify ‘winners’ and ‘losers’. Given that AI capex appears resilient, the current bias appears to be towards the hardware companies that will benefit from the huge amounts of money being spent; meanwhile the software firms that will need to monetise their AI investment, along with industries suspected of being disrupted by AI are being treated with caution.
The investment lens
Looking at the size of their parliamentary majorities, both Keir Starmer in the UK and Sanae Takaichi in Japan both have ‘supermajorities’ but the similarities end there. As Takaichi celebrated her election win on Monday Keir Starmer was on the brink of a leadership challenge. Takaichi, who has only been Japan’s Prime Minister for three months, correctly gambled that her personal popularity would be reflected in support for her party, and her promises of a new era of prosperity and expansive spending pledges have resonated with voters. She has successfully won over Japanese citizens unhappy with rising food prices and stagnant wages.
In the UK, despite a ‘landslide’ win just 20 months ago, and a working majority in the House of Commons of 168 seats, Keir Starmer’s leadership is increasingly being called into question. At the weekend, Morgan McSweeney resigned as Chief of Staff having encouraged Starmer to appoint Peter Mandelson as UK ambassador to the US despite his links to Jeffery Epstein. McSweeney was seen as the ‘architect’ of Labour’s election win in 2024. His departure was swiftly followed by the departure of Director of Communications Tim Allan. Starmer met with the Parliamentary Labour Party to defend his position, vowing not to plunge Britain “into chaos” by quitting. Cabinet members rallied round; only one senior figure, Anas Sarwar, the Scottish Labour leader, urged Starmer to resign for “mistakes” that included the appointment of Mandelson. With his punchy performance to the Labour backbenchers, Starmer appears to have bought himself time. The Gorton & Denton by-election at the end of this month and local elections in May remain potential catalysts for further dissent and challenges.
Japanese bonds have seen some volatility on concerns over Takaichi’s spending promises; UK gilts could yet be unsettled by the prospect of another Prime Minister and Chancellor. If Starmer were to step down before June, that would mean the seventh different UK Prime Minister in just 10 years, and a potential shift to the left in government policy certainly would threaten the recent relative stability we have seen in UK government bonds.
