Weekly Overview 14. – 20. Apr 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: Most major European stock indices rebounded this week, likely driven by signs of progress in trade negotiation efforts, as well as optimism related to the tariff delays and the ECB rate cuts. In its announcement, it appeared that the ECB was turning more dovish and was sending a signal about rates being cut in the future to a level lower than expected. This is due to the expectation that growth will probably be less than what the ECB has been projecting so far, as a result of the escalating trade war. The ZEW indicators of economic sentiment dropped sharply for Germany and the Eurozone in April. This was caused by the erratic policy shifts and the resulting uncertainty globally, which threatens to weigh considerably on export-intensive sectors such as the auto and chemical industries, the metal, steel, and mechanical engineering sectors. In the UK, inflation continued to decelerate further toward target, falling both in terms of headline and core measures. Unemployment remained stable, despite the decline in the number of employees. However, the growth in average earnings remained strong. The euro and the pound both kept appreciating against the US dollar week-on-week, while German and UK 10y yields declined further.

– UNITED STATES: Despite a rise in small and mid-cap stocks, the major large-cap stock indices in the US declined this week, led by the IT sector. One of the main drivers of this was that news of US investments was overshadowed by restrictions on exports imposed by the US administration. Basically, chip sales to China will suffer new limitations in an effort to curb the country’s advances in the AI area. This affected NVIDIA, AMD, and other semiconductor firms particularly negatively. Additionally, the Chair of the Federal Reserve commented on how he was not coming to rescue markets and was not going to resign if Trump asked him to. He stated quite openly that there would not be interest rate changes anytime soon, despite pressure from the administration, and that markets are functioning as expected with increased volatility given the significant level of uncertainty caused by the policies implemented in Washington. Powell also said that it will be a difficult decision for the Fed as it needs to carefully balance between the strong likelihood that the economy might enter a recession, while the risk of re-acceleration of inflation has risen. Moreover, he is not yet certain how long-lasting the inflationary effects of such large tariff rates could be – they could be temporary but might also become more persistent. Other macro indicators show that the housing market is also being hit, with housing starts down in March, and homebuilder sentiment still in negative territory. However, retail sales were up YoY and MoM in March, with rates of increase above expectations, and rising across 11 out of 13 product categories. This was likely driven by customers attempting to front-run the tariff hikes. Nevertheless, the Philadelphia Fed and New York Fed Empire State Manufacturing Surveys show a very clear picture in the manufacturing sector – orders are falling, and the outlook is becoming much darker. The outlook in the New York survey is the weakest since 2001, with firms expecting conditions to worsen in the months ahead – a level of pessimism that has only occurred a handful of times in the history of the survey. Shipments are plunging and the prices keep accelerating, with capital spending remaining flat. In the Philly Fed survey, the indicators for general activity, new orders, and shipments all fell and turned negative. The future activity indicators continue to suggest subdued expectations for growth over the next 6 months. The index for future capital expenditures fell 11 points, with nearly three-quarters of the firms expecting no change in capital spending.

– ASIA-PACIFIC: Japanese stocks also rebounded, with the Nikkei 225 and TOPIX indices both up week-on-week. The ongoing discussions between US and Japanese officials on bilateral trade and the possibility of a deal have contributed to rising investor optimism. BoJ governor Ueda has made comments about the possible policy support that may be required if the shock caused by the uncertainty and rapidly shifting economic conditions leads to further turmoil. 10y JGB yields declined slightly further this week, and the yen gained nearly a percent against the dollar. To the extent that it has been released, the topic of yen weakness against the USD has not been discussed so far in the trade talks. In China, there are some indications of portfolio restructuring. For instance, Deutsche Bank has reported that Chinese clients are reducing their US Treasury holdings in favor of European debt. They have reportedly become more cautious about US investments and are seeing European high-quality bonds, Japanese government bonds, and gold as alternatives to Treasuries. First quarter GDP growth came in above expectations at 5.4% YoY, but that is not a relief for the government, which is still expected to resort to significant stimulus measures to boost domestic demand in the face of the escalating trade war. In Q1, the drivers of growth were still solid industrial production and retail sales, as well as the acceleration of exports ahead of the imposition of US tariffs. But a slowdown in the quarters ahead seems almost inevitable, and its magnitude will depend on what the US tariff policy finally shapes out to be (after all the interim amendments) and how strong the response (foreign and domestic) of the Chinese government will be. So far, the signal from China is that, unless America shows respect, reins in cabinet members, and addresses Taiwan concerns, there might not be trade negotiations.

– BITCOIN: BTC remained stuck in a range between $83k-$86k this week. Despite its relative price stability recently, Bitcoin may soon see a volatility spike, according to analysts. Platform CryptoQuant has revealed that 170k BTC owned by entities with a purchase date between 3-6 months ago have begun to circulate. They note that large movements from this holder cohort often signal that significant volatility is imminent.

policy rate overview AND INVESTMENT ENVIRONMENT

The European Central Bank (ECB) cut its policy rates one more time this week by 25bps, as expected. ECB President Lagarde highlighted that the bank’s outlook is now clouded by exceptional uncertainty, caused by the rapid policy shifts in the US. She noted that this escalation of trade tensions will negatively impact growth, including by hitting exporters, which are a major driver of the euro area’s economy. The rate spread with the US is now over 2pp and has prompted US President Trump to criticize Fed Chair Jerome Powell for being “too late” and to demand lower rates, adding that “Powell’s termination cannot come fast enough”. The Wall Street Journal has now reported that Trump has been considering privately how he can fire Powell, despite advice from Scott Bessent and Kevin Warsh not to resort to such actions. If that were to happen, it would be an unprecedented step that could severely damage the Fed’s effectiveness and independence, not to mention cause a massive loss of trust internationally in the US dollar and US financial markets, and threaten a significant turn in investor confidence in the country.

The St. Louis Fed Financial Stress Index rose for the 3rd week in a row, approaching the peak of stress seen in markets during the SVB crisis in 2023. The Chicago National Financial Conditions Indicator is also starting to show more significant stress in the system. The levels are not yet alarming, but need to be carefully monitored in the coming weeks and months. Since risk exposures could take a hit when financial conditions tighten more rapidly, this may cause increases in losses.