This note contains an overview of our market views, what we are watching, and our portfolio strategy. Any reference to portfolio positioning relates to our Flagship Solution. Clients with bespoke discretionary or advisory portfolios should consult their Client Advisor for the latest update on your portfolio.
Global | What to make of the latest US market moves in the context of the tariff announcement?
The volatility in the US Treasury market – with the 10-year yield rising by more than half a percentage point and the 30-year yield, the benchmark for US mortgage rates, approaching 5% – might have contributed to Trump deciding to partly de-escalate. Another sign of the market worrying about the impact of tariffs on the US economy is the decline of the US dollar. The dollar has fallen to a three-year low against the euro (USD1.14 /EUR). Despite a partial rebound in equities last week, given the pause in tariffs, the weakness of the US dollar and Treasuries reflects some worries about the status of the USD as a reserve currency and of US Treasuries as safe-haven assets.
Even if the economic picture isn’t as bad as feared at the start of the week, the tariffs bring a risk of stagflation (slow growth with rising inflation). The uncertainty around implementation, driven by ‘erratic’ announcements and reversals, has already damaged sentiment more than the tariffs themselves. The US economy has started to show some signs of weakness, and we’ve revised our US GDP growth target down to 1.5% for this year.
Despite negotiations, trade wars could escalate further, but we think the path to resolution is likely to be a ‘process’. Investors now know the new trade rules, and negotiations might well lower uncertainty, though it could take some time. Meanwhile, monetary and fiscal stimulus might soften the blow, although we suspect that inflation is a limiting factor for rate cuts, and high debt levels are a limiting factor for significant public spending and tax cuts.
Generally, keeping long-term return and risk objectives in mind helps navigate this environment. We believe it’s more sensible to stay diversified across regions and asset classes, so that a wobble in one part of the portfolio (like equities) can be offset by a gain elsewhere (such as government bonds). We’re also sticking with our investments in government, high-quality corporate and inflation-linked bonds, gold and commodities. We have a lower exposure to risky bonds, even though valuations are becoming more attractive. This positioning aims to mitigate the impact on portfolios of the uncertainty that’s likely to remain until negotiations start to bear their fruits and policy stimulus sets in.
Wednesday is set to be a particularly busy day on the macro front for the other key market in this trade war. China will release its Q1 GDP growth figures, with expectations of a slowdown to around 4.7% year-on-year from 5.4% previously. March retail sales and industrial production will also be published, offering further insight into domestic demand and industrial momentum. A weaker read across the board could intensify pressure on policymakers in Beijing – and may even influence the tone of trade discussions with the US.
On Thursday, the European Central Bank (ECB) reconvenes for its April policy meeting when it’s expected to announce a reduction in interest rates. Given the downside risks to growth stemming from tariffs alongside lower energy prices, the ECB should convey a confident message that inflation will stabilise around the 2% target.
The UK will report its March inflation print on Wednesday, with consensus pointing to a rise to 3.2% from 2.8%. A hotter-than-expected number could complicate the Bank of England’s path to rate cuts later this year, though on balance markets still expect the central bank to reduce rates further out, given higher economic risks and uncertainty. Rounding out the day, the US will publish retail sales and manufacturing data, both of which will be closely watched to get a sense of how the economy is coping with heightened uncertainty.
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Information correct as of 14 April 2025.
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