Weekly Overview 24. – 30. Mar 2025

The content of this post does not constitute financial advice. It is intended for information and education purposes only.

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The Week in Global Markets

FINANCIAL MARKETS SUMMARY:

– EUROPE: Major European stock indices got hit with a hammer this week. Only the UK FTSE 100 gained slightly week-on-week. Despite signs early in the week that the April 2nd announcements would be “looser” than initially anticipated, the Trump administration introduced new 25% tariffs on all autos and auto parts imported into the United States, coming into effect next week. And this announcement has so far not included any exemptions – on the contrary, the US president threatened that the tariffs would go even higher if any EU country dares retaliate with countermeasures. The euro and the pound both appreciated a little against the US dollar. On the positive side, the flash March PMI surveys showed that private sector activity expanded again as manufacturing output finally grew for the first time in 2 years and to the greatest extent since May 2022. Service providers posted a rise in activity for the 4th month in a row, albeit with the pace of expansion easing to the weakest in this sequence. Growth was sustained in Germany during March, in part thanks to a renewed expansion in manufacturing output. However, business activity in France decreased for the seventh month running. In the rest of the Eurozone, output continues to rise at a solid pace. Nevertheless, new orders are in decline across the euro area, both in the manufacturing and services sectors. Germany is an exception, as new orders are rising again for the first time since March 2022, especially in the manufacturing sector, which finally returned to growth. The rate of input cost inflation in the EA softened in March, mainly driven by services. Selling price inflation also decelerated in March, with services driving this, while output inflation in the manufacturing sector rose. Business confidence also dipped. In Germany, inflationary pressures also cooled down. In the UK, growth re-accelerated in March, driven by the fastest upturn in the service economy since August 2024. Meanwhile, British manufacturers reported severe headwinds to demand from the rising global economic uncertainty and potential US tariffs. Weak international demand resulted in the fastest decline in manufacturing export sales since August 2023. Moreover, manufacturers reported the steepest downturn in production volumes for nearly 1.5 years. Input inflation eased but remained elevated, with service providers recording a steeper rise in input prices than manufacturers, mainly as a result of intense wage pressures and efforts by suppliers to pass on higher payroll costs. Chancellor Reeves announced more spending cuts and a cut in expected UK economic growth for 2025 to 1%, while it could be higher in the years 2026-2029. Actual inflation is declining, but the Office for Budget Responsibility forecasts an increase in unemployment and higher inflation this year.

– UNITED STATES: US stock indices whipsawed this week for the same reason European stocks did – the schizophrenic tariff policy signals. Information technology and communication services sectors led the decline. Even though PCE readings for February were in line with expectations on an annual and monthly basis, the figures are still above the Fed target. At the same time, consumer confidence keeps dropping, and sentiment indicators are plunging further, with 1-year inflation expectations rising to 5% according to the University of Michigan survey. The S&P Global PMI survey results showed that business activity growth accelerated in March thanks to the service sector, while manufacturing output declined. Business expectations for the 12 months ahead reveal concerns over customer demand and the impact of the administration policies. Input prices have risen at the highest pace in 2 years as a result of the tariffs and the increase in employment costs. Recession risks have clearly risen, but a recession is not yet a consensus forecast across Wall Street. However, the drop in confidence is particularly worrying because it affected broadly all income groups, with savings rates rising in the face of uncertainty ahead. But all of these developments, which are evident in soft data (i.e., business and consumer surveys), are yet to translate into the actual hard data readings, which usually happens with a time lag. At a 10% decline, the drop in the US equity market is not yet causing wealthier Americans to significantly constrain spending, but that situation is likely to change if the correction deepens and the market falls 20% or over.

– ASIA-PACIFIC: Similar to Europe, Japan’s stock markets were hit by the new US tariff announcements as auto makers are expected to take a significant hit, and the prospects of retaliation will likely lead to a deterioration in international trade. BoJ governor Ueda stated on Wednesday that if the surge in food prices causes a broader spike in inflation, this might result in tighter monetary policy. These comments came as it became evident that consumer sentiment is hurt by the rising costs of daily essentials, including key staples like rice. The governor also warned that business and household confidence are likely to suffer further from the US trade wars. All of this is raising expectations for another near-term rate hike. In China, corporate earnings announcements were largely in line with expectations and the major stock indices changed very little. In the industry sector, profits declined more than expected year-on-year. There were also increased calls from economic planners to provide additional stimulus to increase consumption as a share of GDP. In India, the Nifty 50 advanced on the week, as the financial service sector is recovering, and RBI rate cuts are likely to commence soon. Monetary policy loosening, credit growth, and expected liquidity injections are anticipated to improve the environment for the financial sector, with banks’ earnings likely to grow in the next financial years. The sector has also been a recipient of growing inflows from foreign investors recently.

– BITCOIN: The largest cryptocurrency is still trapped in a range, currently around $83k, as it fell further during the weekend. The risks posed by the new tariff policies of the US are likely a key factor dragging BTC down against the USD. The conflicting announcements, sometimes within the same day or week, are keeping the crypto market in limbo – any positive news causes a temporary rebound, while any new tariffs, threats, or retaliatory measures result in new dips. The “Liberation Day” (April 2nd) decisions could be key for the course of BTC during the next quarter and even the rest of this year.

policy rate overview

The “Mar-a-Lago Accord”: Can it succeed in completely remaking the dollar-based global financial system?

In the mid-1980s, at the height of the Cold War, there was a glaring problem at the centre of the capitalist Western world: the strength of the US dollar, which until this day serves as the global reserve currency. In order for it to fulfil that role, however, it requires that the flow of dollars across the world is uninterrupted and that the issuing country – the United States – supports that through open trade and capital flows. And this is what the US has done – trading with the rest of the world to the point of accumulating significant trade deficits (while many other countries accumulate foreign currency reserves in the form of USD) and opening its capital account so that the dollar reserves can be invested in USD-denominated assets (such as US treasuries). This has led to a complete dominance in terms of depth and liquidity of the US financial markets and an outsized role of the dollar internationally, including as a tool for political pressure against countries the US deems adversaries.

By 1985, after a period of expansionary fiscal policy and very tight monetary policy to counter inflation (the Volcker years), the dollar had appreciated quite significantly against other major currencies at the time (the Japanese yen, the Deutsche Mark, the British pound, the French franc). This presented a major disadvantage for US industry, whose output was expensive in international markets due to the strength of the dollar. The efforts of various industry lobbies directed at Congress aimed to introduce more protectionist policy measures. The Reagan administration responded by negotiating the Plaza Accord with the G5 countries, whose purpose was a coordinated currency intervention to depreciate the dollar in global markets. It led to a considerable drop in the greenback’s value until the signing of another agreement, the Louvre Accord in 1987, which was aimed at stabilizing global exchange rates (the USD had fallen by about 37.5% against the JPY, 36.8% against the DEM, 23% against the GBP, roughly 30% against the FRF). The US trade deficit against Western Europe did come down, but not so much with Japan, where imported US goods remained uncompetitive due to structural restrictions.

Today, we are witnessing the outlines of a plan to manage the global position of the dollar in a manner that resembles these efforts from the 80s, but with a political tone that borders on coercion. With the “Mar-a-Lago” Accord, the Trump administration likely wants to achieve a restructuring of the financial system, weakening of the dollar, while retaining its status as the largest and most dominant reserve currency in the world. And this, in addition to fixing the US trade deficit and bringing manufacturing back to America. But these are contradictory objectives, and the international environment in which this effort is taking place is dramatically different from the 1980s.
Countries are asked to either surrender to these demands and allow the appreciation of their currencies against the USD in an orderly manner (the accord path via controlled interventions) or they will be unilaterally pushed to achieve that same result (a kind of charge on using the USD as a reserve). The former approach would involve selling dollars and US Treasuries from the countries’ foreign exchange reserves, while switching to acquiring much longer-term bonds (even 100-year bonds), and tariffs for those who follow this path would remain low. The latter approach would involve fees on interest remittances in combination with high tariffs and other measures that would encourage reserve managers to get out of their dollar/dollar-asset exposures. Countries will also be designated as friends, foes or fencesitters depending on whether they resist or play along, which turns this into something beyond a mere currency and economic stability measure, and the whole endeavor becomes a sort of geopolitical pressure tool. Why? Because military support and removal of trade restrictions will be linked to that designation.

There are significant risks with both of these proposals, and a high likelihood that they will not succeed in the medium to long term, even if there is some short-term benefit to show to a domestic audience. We are talking risks of market chaos if some major Treasury bondholder (e.g., China) decides not to play ball, pricking of stock (and other risk asset) bubbles, a hit on those countries that use the dollar the most if there is significant volatility and devaluation, risks for global trade (especially if forced bond swaps are accompanied by protectionist retaliation), and of course inflation risks. And we cannot even begin to fathom yet what panic and mess a reorganization in the financial sector could bring about, particularly if borrowing power is affected and public debts start to blow up. Individual investors should prepare for rising uncertainty and possibly much higher volatility ahead, making sure they diversify accordingly and as suitable for them.