Weekly Overview 31. Mar – 6. 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: A historic shock for the European stock markets after Trump’s “Liberation Day” tariffs: STOXX 600 down 8.44% week-on-week, STOXX 50 down 8.73%, the German DAX and French CAC both down 8.10%, Italy’s MIB down 11.58%, UK’s FTSE 100 down almost 7%. The EU got hit with a 20% tariff rate, the UK with 10%, which are much higher than the average effective tariff rate applied to US imports in both locations. Government bond yields dropped in line with US yields, which reflected a flight to safety in the wake of the equity market carnage, and an expectation that the much higher risk of recession could bring forward further loosening of monetary policy that could bring rates down. At the same time, the euro appreciated while the pound depreciated against the US dollar, with both the EU and the UK preparing their responses to this unexpectedly punishing announcement. But dovish expectations might not come to fruition: sources within the ECB have expressed concerns about the rising uncertainty and have indicated that rates could remain on hold for a while until the impacts of the sharp policy shifts are fully understood. There was a cautious tone from ECB President Lagarde and other members; however, markets are clearly pricing in a rate cut in April and in June at the moment. Inflation numbers at the moment support such moves, as headline and core figures both went down YoY in March in the euro area and Germany. But Germany alone is perhaps the country most exposed to the escalating trade war – global trade combined (exports and imports together) has a proportion to GDP equal to 83% (far bigger than other European countries), and its largest annual trade surplus is with the US – about €70bn. And its second largest trading partner – China, with which Germany has a trade deficit of about the same size as the surplus with the US – has nowhere near the large consumer market of the US to absorb German exports. This is likely to turn into an EU-wide problem.

– UNITED STATES: US stock indices took a bigger hit than other international markets after the tariff release (nearly $5tn loss), and the Fed is in a very precarious position that prevents it from boldly acting to relieve the pressure here. A recession is now the most likely case for the US economy if this new policy remains in place, and inflation is expected to almost certainly rise in the short term. Economic surveys from March are hinting at the coming impact: the ISM PMIs showed that manufacturing activity in the US is back in contraction, with new orders falling and price indices rising. Manufacturing employment is also starting to tick down. The services PMI remained slightly above 50, but is notably down compared to the February reading and significantly below expectations, painting a similar picture in terms of direction of these developments. Surprisingly, the job report came in with more job creation than expected for March, but that did not improve stock market sentiment and, in fact, appears to make the Fed’s job more difficult. The shift in investor confidence was positive news for the Treasury bond market, where yields declined – the 10y even dipped under 4% for the first time in half a year. The severity of the new tariff policy has been negatively viewed by politicians on both sides of the aisle in the US Congress, with republicans pointing out that the last time a republican president introduced such monumental protectionist measures was the Smoot-Hawley Act in the early 1930s. It not only exacerbated the Great Depression, but also resulted in their party losing control of the House and the Senate for 60 years. Nevertheless, US Commerce Secretary Lutnick stated on Sunday that tariffs will stay in place as the US President wants to “reset global trade“. And US Treasury Secretary Bessent said that there is no reason to price in a recession and that the market is likely overreacting as it underestimates Trump. Ironically, some of the biggest corporate donors of the President’s will be the hardest hit as a result of this massive trade shock, given the impact on their complex international supply chains.

– ASIA-PACIFIC: Japan got hit with a 24% tariff, to which the Nikkei 225 responded with a drop of 9% and the TOPIX index responded with a decline of 10%, with bank stocks plunging the most. The 10-year JGB yield went down sharply to 1.18%, while the yen appreciated further to the 146 range, similar to the development in the euro area. This presents another challenge for Japanese exporters in addition to the impact of the tariffs. This appears to be changing the calculus for the next BoJ hike as well, as uncertainty and the risks the growth have increased so materially. On the one hand, we have the possible further increase in inflation, especially due to disruptions to global supply chains and restructuring of global trade, but on the other, we have a potential global recession to consider, which could lead to a disinflationary or even a deflationary impact. China’s stock market was also down, although it only had 1 trading day after the tariff announcement to react, as Friday was a holiday. Nevertheless, the political establishment was quite adamant in its determination to retaliate in order to defend its economy. There will be a matching 34% levy slapped on US imports as well as export controls on rare earths. Trump stated that China is panicking and “playing it wrong”, but Beijing pledged to continue to take “resolute measures” to safeguard its sovereignty, security, and other interests. There will also be an antidumping probe into medical CT X-ray tubes from the US, poultry and sorghum imports from a handful of U.S. companies will be halted, and 11 US defense companies will be added to a so-called unreliable entity list. China is also likely to roll out more fiscal stimulus based on the impact and the ability to negotiate better trading conditions. Unlike China, India seems to be taking a different approach – instead of retaliating, it might already be attempting to negotiate a deal. Already in previous months, there were some steps to address the trade imbalance, and India might be ready to cut tariffs on US imports worth $23bn, according to some reports. Per Reuters, that could include high-end bikes and bourbon, as well as digital services taxes that affected US tech giants. Economic growth in the country will likely still slow down, but much less than other Asian economies, and is very unlikely to turn negative.

– BITCOIN: BTC reached a weekly high of nearly $89k mid-week, and then dipped back to the $81-82k after the tariff announcement. This has prompted some crypto experts to call this an effective “decoupling” of the largest cryptocurrency from the US stock market, as its drop was much less severe compared to the major equity indices. However, from a long-term perspective, that is hardly yet the case. During the trade war of 2018 (the first Trump term) with China, Bitcoin volatility rose and the price eventually also went up 15%, but this time the uncertainty is much higher and the shock of a much bigger magnitude. If the policy stays in place, the shockwaves are likely to hit the financial system and the risk-off sentiment could hit the crypto market harder. If there is a broader effort to deleverage, this may lead to a more significant correction in BTCUSD. Turns out, according to crypto analysts, these are BIG IFs – too big in fact, as tariffs might get reversed within 6-12 months as trade negotiations pick up pace and yields come down, alleviating the economy. It is not at all clear at this point that this is going to happen, but if the Fed does intervene, then crypto will probably benefit along with stocks.

policy rate overview

Will the Fed step in to bail out the markets?

Suppose the trade war that the United States declared on almost the entire world this week escalates. In that case, the US and the rest of the major as well as smaller affected economies are most likely headed for recession. We have already seen the first steps in this escalation in China’s reaction, which matched the additional 34% tariff announced on Wednesday and did not cave in to the pressure coming from the Trump administration. As the stock market was cratering on Thursday and Friday, both stock and bond volatility surged. Markets and analysts seem to be adjusting their rate cut expectations as a result of these developments, now up to 4-5 cuts in the course of 2025 (which is too optimistic).

As infeasible (and mutually inconsistent) most (if not all) of the aims of Trump’s tariff plan might be, they have the potential to make a significant dent in the global financial system and have significant negative repercussions around the world. Especially if they encourage countries to move off the US dollar and begin disposing of US financial assets. Growth and disposable incomes are bound to shrink if the tariffs stick, while the impacted countries figure out ways to divert and restructure their global trade. The calculation on which the so-called “reciprocal” tariff rates were based is nonsensical, as it factors in not the actual trade barriers and tariffs but rather simply the individual trade deficit with a given country as a ratio of its total exports to the US. There is no account made for the services balance as well, where some countries and blocs (like the EU) have a considerable trade deficit with the US. These flaws were widely criticized by experts in the last few days, and central bankers like Fed Chair Powell are fully aware of the risks that come with these questionable methods used to determine such significant policy measures. He did warn of the dangers of rising inflation and slowing growth in the near term, with the risk of unemployment climbing more substantially in the coming months. The largest financial institutions are already revising upward their recession probability estimates for this year, with some reaching over 50-60% (e.g., JPMorgan, BofA, Deutsche Bank), and analysis showing that with this magnitude of tariffs, a US recession would be a baseline scenario.

Powell said that “the new administration is in the process of implementing substantial policy changes in four distinct areas, trade, immigration, fiscal policy, and regulation,” and that the monetary policy stance is well positioned to “deal with the risks and uncertainties” as they gain a better understanding of the impacts. Therefore, the Fed will remain in a “wait-and-see” mode for the time being. But the truth is that US President Trump has been increasing the pressure for Powell to do the one thing that he stated long ago he felt the economy needed – lower rates. And he reiterated that after the “Liberation Day” announcement. The Fed is trapped – because when the impact is revealed in hard economic data – in terms of both higher inflation and declining growth and employment – then finding the balance and choosing the right steps will mean compromising on one of its mandates. However, if financial markets continue to plunge in distress, and that carnage spills more meaningfully over to credit markets, then the Fed might not have a choice, even if it does not want to rescue the stock market at the moment. And there are already signs that this may be happening, with credit spreads widening further and quite drastically over the last few days. We have leveraged positions (including highly leveraged carry trades) unraveling, which is why hedge funds have been reportedly hit with the biggest margin calls since the onset of the pandemic. Bloomberg reported that the US Treasury Secretary Bessent has been receiving calls from Wall Street executives with a request that the administration reconsider the tariffs. Even so, Bessent gave an interview in which he advised the rest of the world not to retaliate: “Sit back, take it in, let’s see how it goes. Because if you retaliate, there will be escalation. If you don’t retaliate, this is the high-water mark.”