Welcome to this week’s Market Pulse, your 5-minute update on key market news and events, with takeaways and insights from the Sidekick Investment Team.

Today, we’re looking at America’s efforts to isolate China, ministers pressuring UK pension funds, and falling UK mortgage rates.

But first, our number of the week…

-0.3%

That’s how much the US economy shrank in Q1 2025 according to the advance estimate from the Bureau of Economic Analysis. It’s the first time US GDP has contracted since 2022.

Sidekick Takeaway: While a shrinking US GDP certainly grabs headlines, this figure may overstate the level of weakness in the US economy. Q1’s calculations were somewhat distorted by higher-than-usual imports as businesses got ahead of tariffs, which will likely be offset by lower imports (and thus stronger GDP) in Q2.

Now to our main stories…

Only have a minute to read? Here’s the TL;DR:

• America’s efforts to isolate China through higher tariff rates and exclusionary trade deals are backfiring. In response, trading partners like the EU and Japan appear to be stepping closer to China, portending a longer and more destructive trade war.
• UK ministers are considering making increased domestic allocations mandatory for UK pension funds. Not only would such a move be legally questionable, but it would fail to address some of the structural investment challenges facing the country. 
• UK mortgage rates fell this week to their lowest level since 2022. While this data is certainly welcome news to homeowners and homebuyers, it is driven by increased expectations of BoE rate cuts, indicating troubled waters ahead for the UK.

It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.

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Subtraction by Division: Trump’s China Strategy Backfires

Donald Trump’s tariff strategy has been attributed to many motivations, including generating additional revenue and revitalising US manufacturing. 

But lately, another reason has taken centre stage: isolating China.

America’s tariffs on China now stand at roughly 124%, compared to just 10% for the rest of the world. 

Reportedly, the US is planning to extract commitments to implement trade restrictions with China as part of any tariff reduction deals.

As the trade war evolves, however, this strategy appears to be backfiring. 

Trump’s China strategy could prolong trade war

Trump has sought to box China out of the global trading system. But America’s trading partners are increasingly turning toward China, not away:

• Representatives from South Korea, Japan, and China have renewed long-dormant free trade talks.
• China and the EU have discussed joint responses to Trump’s tariffs.  
• Chinese President Xi Jinping recently wrapped up a tour of Southeast Asia, where he signed dozens of economic cooperation agreements. 

China has seized on Trump’s chaotic approach to tariffs, painting itself as a stable and reliable alternative.

In addition, China recently warned trading partners about making deals with the US that undermine the country’s interests.

Ideological differences will limit China’s sphere of influence, most significantly when it comes to trade deals with the EU and Japan.

Nonetheless, it’s clear that America’s efforts to isolate China are falling short. Attempts to foster a united front have only led to further division.

Sidekick Takeaway: By attempting to box out China, America has added a fractious dimension to an already destructive trade war. The fact that negotiations are currently taking place under the looming resumption of ‘reciprocal’ tariffs only makes the US seem even less reliable.

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Voluntary Obligation: UK Pension Funds Warned on Domestic Investment

Chancellor Rachel Reeves has long sought increased domestic investment by UK pension funds in a bid to enhance the country’s growth.

Plans have included the creation of UK ‘megafunds’ to unlock up to £80 billion in fresh investment, inspired by Australia’s pension model. 

As part of these changes, Reeves is soon expected to announce an agreement with pension fund managers to increase their domestic holdings. 

The deal could see funds allocate 5% of their assets to private UK investments. UK pension funds currently hold a lower portion of their assets domestically than global peers. 

So far, this arrangement has been pitched as a voluntary deal. 

Reportedly, however, ministers are warning that the targets could become mandatory if managers fail to live up to the agreement. 

Mandating investment won’t solve the UK’s challenges

The government mandating pension funds to hold a certain percentage of their assets domestically would be legally complex.

Pension fund managers have a fiduciary responsibility to invest according to savers’ best interests, not the whims of the government. 

Moreover, such an arrangement is merely treating a symptom of the UK’s challenges, not a cause.

If the government wants to see pension funds increase their domestic allocations, they should take steps to make the UK a more attractive investment environment.

These include promoting pro-growth policies, investment-friendly regulations, and improved access to investor education. 

Sidekick Takeaway: Requiring UK pension funds to increase domestic allocations without addressing the reasons those allocations are so low misses the point. Treating the UK’s underlying issues will help mobilise investment capital far beyond what the government can mandate. 

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A Welcome Reprieve: UK Mortgage Rates Fall

In a boon to UK consumers, mortgage rates recently fell to their lowest level in nearly three years.

Last week, the average two-year fixed mortgage rate in the country dropped to 5.2%. 

The rate was last lower before Truss’ disastrous mini-budget sent gilt yields soaring in September 2022. The average five-year fixed rate also fell to 5.1%.

This trend should benefit both first-time homebuyers and those looking to remortgage. It will also be welcome news for Labour given stubborn cost of living trends. 

Still, this data does have an important caveat: mortgage rates are largely falling on expectations of increased economic challenges for the UK.

BoE expected to cut rates on growth fears

Despite stronger-than-expected growth to start the year, the outlook for the UK economy has grown more complex due to Trump’s trade war.

In response, markets have been increasing their expectations for rate cuts from the BoE.

• In an attempt to stimulate spending over saving, the BoE reduces interest rates to help support the economy. 
• Traders are now pricing in four rate cuts this year, up from just two at the end of March. 
• In response, the yield on the two-year gilt has dropped to 3.8%, down from a peak of 4.6% this year.

As a result, while falling mortgage rates are good news for homeowners, the implications for the economy as a whole are more nuanced. 

Sidekick Takeaway: Despite market forecasts, it remains to be seen whether the BoE ultimately has the capacity to cut rates four times this year. Given the uncertain tariff outlook, the trade war could end up accelerating domestic price pressure, limiting the BoE’s ability to support the economy. 

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Notices

Please remember, investing should be viewed as longer term. Your capital is at risk — the value of investments can go up and down, and you may get back less than you put in.

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