The risk of a global recession remains low as pro-growth globalization accelerates outside the U.S., offsetting the impact of Trump’s tariffs. Central banks are expected to adopt accommodative policies, cutting rates if needed.
The U.S. has imposed tariffs while warning against retaliation – a warning China ignored, responding with equivalent tariffs on U.S. goods and rare earth export controls. Starting April 10th, China will impose a 34% tariff on all U.S. imports, mirroring Trump’s measures.
We expect tariffs to slow growth, leading to lower energy and commodity prices, thereby easing inflation risks. The primary impact will be reduced growth rather than sustained inflation. In response, Western central banks (Fed, ECB, BoE) are likely to cut rates to support economic activity amid political and growth pressures.
In the U.S.: Sentiment weakens, but hard data hold firm
Recent economic sentiment (e.g. University of Michigan, PMI) has weakened, driven by trade policy uncertainty and tariff-related inflation concerns – a shift from early-year optimism. However, hard data (i.e. job openings, layoffs, and retail sales) remain stable, supporting a lower ~2% GDP growth. A prolonged sentiment slump may eventually weigh on activity, but for now, fundamentals remain resilient.
In Europe: European growth stabilizes at low levels (1%)
Q4 2024 GDP stalled, but early 2025 data show fragile stabilization. Tariff uncertainty weighs, though potential Ukraine ceasefire and fiscal stimulus offer upside. Risks remain two-sided, with Germany’s election outcome mildly growth-positive. Inflation has eased significantly from peaks, with the European Central Bank (ECB) confident disinflation remains on track. Weakening demand continues to dampen price pressures, a trend likely to persist through 2025.
In China: Confidence boosted, policies drive growth outlook
Confidence is recovering following President Xi Jinping’s meeting with tech leaders and the launch of DeepSeek. Market rally and supportive policies are expected to boost sentiment and consumption. The National People’s Congress (NPC) is set to continue accommodative fiscal and monetary policies, aiming for 5% growth, a 4% fiscal deficit, and increased bond issuance. The State Council will focus on domestic demand, innovation, and housing stability, with limited changes expected in response to U.S. tariffs.
Tariff shockwaves: Markets reprice a new risk regime
Trump’s tariff escalation has triggered broad market volatility YTD. U.S. equities bore the brunt, with the S&P 500 down 14% and the Nasdaq off 17% – the sharpest declines since the Covid-era selloff. European markets held flat, while China’s rally lost steam: the Hang Seng China Enterprises Index remains up 15%, and China Tech +21%, but momentum has stalled.
Geopolitical tensions spilled into defense markets. Trump’s fighter jet “kill switch” spooked allies, driving a rotation into European defense names, which outperformed.
Volatility surged, with the VIX jumping from 12% in December to 45% in April. The U.S. dollar weakened 6% YTD, pressured by the tariff fallout and renewed concerns around the “Mar-a-Lago U.S. Treasury default threat.”
Risk-off sentiment drove a flight to safety. Bonds and gold rallied, pushing the 10-year U.S. Treasury yield below 4%. Bitcoin fell 10%, undermining its “digital gold” narrative. Oil declined 14% YTD amid global growth concerns and easing tariff-driven inflation.
Outlook: While recession risks have risen, a global downturn remains unlikely. Pro-growth policies outside the U.S. are cushioning the blow, and central banks stand ready to ease if conditions deteriorate further.
The tariffs threaten to seriously hamper global growth. The larger-than-expected tariffs sent global equity markets lower. Tariffs are likely to hit earnings modestly but weigh more significantly on valuations, particularly in export-heavy sectors. Volatility in equity markets should remain at elevated levels.
In the U.S.: Global rotation, from U.S. dominance to diversification
The S&P 500 posted its first 14% correction since Covid, diverging from flat or positive global equity markets. U.S. exceptionalism is fading, as policymakers reverse course, prompting a shift in global equity leadership. Elevated U.S. tech valuations and crowded positioning triggered a sharp rotation into non-U.S. equities. If the U.S. slowdown remains moderate, this reallocation should continue, backed by relative value appeal.
In Europe: Rotation towards defense and recovery
Although the overall performance is flat year to date, European equities are outperforming in 2025, marking a sharp reversal after years of lagging U.S. markets. Investor sentiment has shifted dramatically, overcoming concerns around fiscal risks and geopolitical tensions. Defense stocks outperformed amid rearmament trends, while banks benefit from improving loan growth. This rotation reflects a broader structural re-rating as Europe moves toward renewed investment and recovery.
In China: Re-rating, momentum, and pro-growth policies
Chinese equities have staged a strong rally, with the HSCEI up 26% in 2024 and 15% YTD, driven by policy tailwinds, DeepSeek momentum, southbound flows and rotation out of the U.S. This has sparked a broad re-rating, attracting renewed global investor interest. China offers a deep pool of high-quality names across structurally growing sectors – tech, internet, consumer, and services. These sectors stand to benefit from China’s pivot toward a consumption- and innovation-led growth model. Ongoing industry innovation and new listings are set to accelerate earnings growth and create compelling investment opportunities.
Dollar weakens 6% YTD on tariffs
Larger-than-expected tariffs have driven the U.S. dollar lower. Markets are pricing in a greater U.S. tolerance for economic pain to achieve policy objectives, adding to USD bearishness. Under Trump’s second term, foreign currencies have shown greater resilience relative to past periods of stress. We expect further USD weakness as Fed cuts, budget deficit, and trade imbalances erode its valuation, particularly vs RMB and JPY.
Given increased FX volatility tied to tariff uncertainty, we recommend hedging EUR, RMB, and JPY exposures.
EURUSD at 1.10: Gains 6% YTD on dollar weakness amid lingering headwinds
The euro rallied to a five-month high of 1.1150 vs the USD, nearly reversing post-election losses. The dollar weakened as U.S. yields fell on mounting growth concerns following Trump’s tariff move. However, downside risks for the euro remain, driven by continued ECB rate cuts through 2025 and the unresolved war in Ukraine.
USDRMB at 7.30: China matches tariffs, PBoC anchors FX stability close to the all-time high
China announced a 34% tariff on all U.S. imports, mirroring recent reciprocal measures. Despite escalating trade tensions, the yuan held steady close to 7.30 as the People’s Bank of China (PBoC) maintained firm daily fixings. Chinese authorities are expected to prevent significant currency appreciation or depreciation. China’s policy stance reflects a desire to preserve macro stability amid external shocks. Cumulatively, U.S. tariffs since Trump’s return could trim up to 1.5 percentage points from China’s 5% annual growth.
USDJPY at 147: Yen surges 7% YTD on tariffs and safe-haven flows
The Japanese yen rallied sharply following Trump’s sweeping tariffs, as global risk sentiment deteriorated. Heightened uncertainty triggered safe-haven flows, pushing JPY higher and U.S. Treasury yields lower. The narrowing U.S.-Japan rate differential added to yen strength, while USD fell toward multi-month lows. Rising expectations of Fed rate cuts contrast with potential Bank of Japan (BoJ) hikes, amid signs of domestic inflation. This divergence supports continued JPY outperformance, with downside pressure building on USD/JPY.
Central banks are prioritizing growth risks from tariffs over inflation concerns, with markets pricing in 100bps of Fed cuts and 50bps of ECB cuts later this year. As equities declined in 2025, bonds outperformed, and the bond-equity correlation turned negative, restoring diversification benefits. We see yields steepening into year-end, with the 10-year likely rising above 4.50% on persistent inflation and U.S. debt supply concerns.
How to benefit from the cycle of central bank rate cuts?
Bond yields remain high relative to the historical level of the past 20 years, with wider credit spreads reflecting political unrest in the U.S. and Europe. Despite this, central bank support and resilient economic growth are keeping default rates low, creating a prime opportunity to increase fixed income exposure. Investors can lock in high rates by investing in bank bonds, yielding nearly 6% in USD and 4% in EUR over 5-10 years.
Gold: Tariff fears and physical demand drive gold surge close to all-time high at USD 3,012/oz
Gold has gained 14.6% YTD, supported by safe-haven flows and tariff-driven physical demand. A temporary USD 60 arbitrage between New York and London closed after record metal shipments to meet U.S. demand. Investor fears over potential tariffs main consistent buyers, accumulating roughly 1,000 metric tons annually.
Oil: Down 13.6% YTD to USD 62/bbl on macro risks
The oil futures term structure remains in backwardation (the oil futures price is 3.5% annualized lower than oil spot today), signalling a relatively tight market. Crude oil is down 13.6% YTD amid fears that U.S. tariff-driven uncertainty could dampen global growth. With prices under pressure, OPEC may delay planned production increases as internal divisions persist.
