Weekly Overview 7. – 13. 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: Unlike their American counterparts, most major European equity indices dropped further this week, despite the delay in reciprocal tariffs. Central banks in Europe now seem more concerned about the health of their credit institutions and financial markets, especially in the context of liquidations across various US asset classes (stocks, bonds, USD) and the possibility for more corrections in many markets. GDP growth in the UK was above expectations in February, both YoY and MoM, thanks to the services sector. The markets are pricing in a faster pace of rate cuts in the course of 2025, especially given the anticipated trade war effects. In Germany, industrial production dropped again in February, with falling output in the food sector, energy and construction, partially offset by manufacturing of electrical equipment. Euro area retail sales were up in February by 0.3% MoM and 2.3% YoY, with gains in Spain, Germany and France, and declines in Italy and the Netherlands, among others. Italy’s credit rating was upgraded by the S&P this week, from BBB to BBB+. This was attributed to the country’s progress in reducing its budget deficit and strengthening its public finances. S&P expects the deficit to drop under 3% of GDP by 2027. German bonds appeared to move in the opposite direction to their US and UK counterparts this week, as financial conditions tightened. 10y German yields fell, while 10y UK yields rose along with US yields. The euro and the pound both strengthened against the USD as investor confidence in the dollar was shaken quite significantly on dramatic trade war escalations by the US and China. There seems to be a major rotation with foreign investors diversifying away from US assets and into other regions, and attempts to hedge, including with European assets. ECB President Lagarde commented on Friday that the institution was ready to deploy its policy tools to maintain financial stability and that it had a solid track record in devising tools when required to deal with turbulence.

– UNITED STATES: It was a very volatile week in both the US stock and bond markets (see detailed commentary in the next section below). With the rapid spike in US Treasury yields across maturities, especially on the long end of the curve, markets were clearly flashing a warning about tightening liquidity amid disorderly liquidations. The selloff likely involved actions by levered funds, as well as international institutions and central banks/governments. The equity market shifted to a state of extreme fear and has stayed there despite a rebound on Wednesday after the tariff delay and Friday. There is still an elevated risk of a further downturn in stocks, as is visible in Goldman Sachs’ bull/bear market indicator. Even the positive news on March inflation was not enough to calm investors, who see uncertainty ahead as a major obstacle to returning to a risk-on mode. As the US government seems. to be changing its policy almost every day and expanding or shrinking its scope unexpectedly (though not for the insiders), the Fed sees downside risks to employment. and upside risks to inflation, and will retain their “cautious” approach. One may argue that this may quickly change if the distress in. the bond market triggers a credit freeze and a financial crisis. Unfortunately, soft data seems to be deteriorating rather fast, as the University of Michigan survey for April shows. Consumer sentiment and expectations have dropped considerably, as expected business conditions worsened, and 1y and 5y inflation expectations reached levels not seen for decades. Data reported by FactSet suggests that S&P 500 Q1 earnings per share (EPS) estimates have been cut by 4% over the last 3 months, higher than the historical median for the index since 2000.

– ASIA-PACIFIC: Japan’s benchmark stock indices fell, with the banking sector leading the decline. However, trade talks are expected to begin next week, which provided some hope and resulted in a bounce in equities, along with the announcement of the tariff delays. Japanese cars are not part of the 90-day postponement, so the auto sector will still get hit by a 25% tariff rate. As the USD and US Treasury selloff intensified, the yen strengthened to the 142-143 range. However, these moves in the currency markets seemed to alarm policymakers, but the BoJ is now expected to delay the next rate hike. 10y JGB yields rose by 18bp to 1.36%. In China, stocks were down week-on-week, although there were some bounces driven by hopes for more stimulus for the economy. During the week, the tariff rates was increased several times, reaching 145% on the US side and 125% on the China side, with Beijing saying it won’t go any higher because at this point the tariff raises had become “a joke” – an imposition of abnormally high numbers with no practical significance. There are estimates that these levels of tariffs will shrink China’s GDP between 1 and 2% in 2025, but forecasts vary. China has also responded by suspending exports of a wide range of critical minerals and magnets, threatening to block supplies of components central to many industries (including auto, aerospace, semiconductors, military and defense, etc.).

– BITCOIN: BTC recovered rapidly on Wednesday after the relief of the tariff pause, fluctuating around the $83k-85k range at present. As the US dollar kept declining in the latter half of the week, Bitcoin remained relatively stable. However, that is unlikely to last, given almost everyday changes in the trade policy and its scope. Also, the latest breakout was supported by relatively low volumes, which underscores the weakness of the moves in the current uncertain regime and points to more volatility ahead. In a depression or a recession scenario, BTC is almost certain to drop below $50k.

policy rate overview AND INVESTMENT ENVIRONMENT

US Assets and the US Dollar Are Suddenly Unattractive Globally

The US administration’s trade war hit a wall this week as the bond market very clearly flashed a red card, signaling that the attempt to restructure the global trade system was on the brink of causing a financial crisis – both in the US and likely globally. There was a major selloff in US Treasuries, driven by multiple factors linked to the panic caused by policy uncertainty and the severity of the tariff war, especially with regard to China. SOFR swap spreads (the difference between the SOFR swap rate and the Treasury yield of the same maturity, indicating the strength of the demand for US Treasury securities, as well as credit and liquidity premia embedded in swap contracts) suffered a sharp collapse into negative territory across maturities, indicating significant market stress. This is a signal of the rising demand for cash over duration and is likely caused by distress in dealer balance sheets, margin calls and unwinding of basis trades by levered funds, and a rapid attempt to de-risk which can be seen at the interbank markets. We also observed further widening of high-yield spreads and a bear steepening of the US Treasury yield curve, similar to what we saw in 2008 right before the Fed was forced to step in and intervene. Basically, bond markets are breaking and “begging” the Fed to cut fast and deep, with collateral quality rapidly deteriorating, while the US government continues to increase the deficit and debt to a market with fewer buyers.

The situation forced Donald Trump’s hand and he had to offer some relief, caving two times during the week: first, on Wednesday he decided on a 90-day delay of the tariffs for everyone, except for China where tariffs reached a combined 145% (the delay had already been leaked on Monday, causing a rapid swing in the stock market as it was almost immediately denied by the White House, only to come true later); and second, late on Friday after the market close, it was announced that smartphones, computers and other electronics would receive a tariff exemption (however, on Sunday, April 13th, US Commerce Secretary Lutnick stated this exemption will be only temporary until semiconductor tariffs are implemented, and Trump’s posts seem to confirm that there is no complete exemption). The former concession helped US equities to end the week on a positive note, although volatility remained quite elevated and the bond market stayed in pre-crisis mode for the rest of the week. In fact, both the stock and bond markets experienced swings last week that were so big that they were only smaller than the ones observed during the Global Financial Crisis (GFC) or the crash of the pandemic lockdowns. Financial conditions are now perceptibly tighter and this is already having an effect on lending and provisions (e.g., in its latest earnings release this week, JPMorgan announced it has set aside 75% more provisions to cover loan losses in anticipation of more defaults; weekly bankruptcy numbers for companies with over $50m in liabilities spiked to numbers not seen since the lockdown recession). BlackRock CEO Fink and JPMorgan CEO Jamie Dimon both indicated that the probability of US recession is quite high at the moment, with the former noting that the country is most likely already in one. (Interestingly, due to the weight of China in global trade, even after the first concession, the effective tariff rate remained quite high.)

The developments this week have led major investment funds, companies and governments to reconsider their approach to investing in US assets as a whole. This could be one reason why we observed the trifecta of doom, usually seen only in emerging markets or economies suffering from severe crises: a drop in the stock market, a drop in the Treasury bond market and a rapidly depreciating US dollar. For example, the Financial Times reported that Danish and Canadian pension funds are halting their US private investment holdings due to the erratic tariff policy blitz that is causing stability concerns. Some of them have already become overexposed to the US markets over the last few years or more, and are finding the hostile political rhetoric about a takeover of territory an unacceptable risk. Foreigners were dumping US stocks last week at the fastest pace in more than 2 years, while the EURUSD saw a 2-session move that was the largest since 2009. Unfortunately, the back-and-forth approach to the tariff policies were likely taken advantage of by those closest to Trump, as some disclosures pointed to the announcements being used for market manipulation while they pre-empted them to do “insider” trades. Actions, which are now likely to become subject to congressional investigations.

Volatility is likely to continue in the following weeks and months unless the US President decides to change course. Otherwise, this problem will spill over to the rest of the world, as there is quite a considerable amount of USD liabilities across the global financial system (including on-, off-balance sheet and derivatives). If the US does de-dollarize the existing financial order globally (which the US claims it does not aim to do) in a disorderly manner, without a coordinated transition, this will be a shock like no other. It would be like detonating a financial nuclear bomb.

Businesses are already scrambling to respond to the daily whims of Trump and decide how to plan, how to price products, or whether to invest or not. And not just small businesses. Given the importance of China and the rest of Asia for Apple’s business model, Bloomberg reported that the company had been on the brink of a crisis until Friday. Its complicated supply chains were about to be upended as seriously as during COVID, until its products received an exemption (although a future semiconductor tariff may still hit them, but to a much smaller extent). Apple was already preparing a plan to adjust the supply chain to make more iPhones in India in the short term, but that would have still presented an enormous difficulty (given the size and scale of the facilities that exist in China) and would have raised the cost. There was also a risk of retaliation from the Chinese government if such a rapid move out of the country were to take place. But the most shocking result of all this was the assessments of the potential price increases. There were reports about the price of the base model iPhone expected to rise from $1,000 to $2,500 or more. The Wall Street Journal published an analysis showing that the tariffs (before the exemption) could add about $300 to the total cost of the base model.

What will central banks do next? The Fed is in a difficult situation as it cannot openly make a policy pivot without causing inflation fears to spike, although that is already happening per soft data. However, several members spoke out this week, signaling the readiness of the central bank to help stabilize the market if needed. While this may be aimed at calming things down, let us not forget that there is a tendency for markets to test such pledges, especially when stress is high. JPMorgan CEO Jamie Dimon also commented that he expects that this situation will prompt the Fed to intervene in the Treasury market, once it “starts to panic a bit more”. But the statements by the Fed also included, unsurprisingly, comments about not seeing evidence of rising long-run inflation expectations, or evidence that the conditions are yet similar to those during the pandemic. According to the CME FedWatch tool, the implied probability of a rate cut at the next Fed meeting in May has dropped from 60% at the start of the week to less than 17% now. In Europe, even after the tariff pause, the expectations for a major hit to growth have taken hold and the market is now almost certain that the ECB will continue with rate cuts next week. According to Bloomberg, consumers and businesses across the euro area are losing confidence, while the euro has appreciated rapidly, helping alleviate domestic inflation pressures but causing challenges for exporters. Future ECB meetings may keep rates on hold around 2%, per what the market positioning implies, but economists point out that more cuts might be necessary if conditions keep deteriorating. The stance of the Bank of Japan going forward will depend a lot on the talks between the policy negotiations with the US, expected to begin April 17th and to cover the topic of currency policy. At the start of May, the BoJ will likely hold rates at 0.5% as it needs to better understand and analyze the impacts of Trump’s tariffs but it may provide guidance on further rate hikes to condition the market so that a decline in the yen is avoided. Trump has criticized Japan for maintaining a weak yen deliberately, and will probably put more pressure during the negotiations to strengthen it versus the USD.

A final note on US fiscal policy. Despite election promises, the Republican fiscal policy is set to continue expanding the budget deficit – the Senate’s proposed Budget Resolution for 2025 will allow policymakers to add $5.8tn to the primary deficits in the next 10 years, significantly exceeding many recent laws in their debt impacts. It would also be more than twice as much as the House budget additions. The budget resolution allows for $1.5tn in new tax cuts plus $500bn in new spending, primarily for immigration and defense. As the Cato Institute points out, this will be on top of the current policy baseline tax cuts of $3.8tn. As this doubles the growth of the debt-to-GDP ratio, public debt is projected to reach 211% of GDP by 2055. The House Budget, passed by Republicans, will not only allow for major tax cuts for the wealthy, but will also introduce significant cuts that will gut Medicaid and the Affordable Care Act (at least $880bn) and food assistance programs (at least $230bn). Unsustainable fiscal irresponsibility in times of chaotic policy choices in other economic domains is unlikely to spark a return of investor confidence.