2024’s solid growth base is fading as trade tariffs and unpredictable policies take a toll. Uncertainty is holding back business investment and hiring, especially in the U.S. Global spillovers are expected, though local stimulus measures offer some offset. Inflation remains moderate; tariff impacts may cause only temporary price increases. Weaker U.S. growth could lead to disinflation pressures through falling commodity demand. Central banks are likely to cut rates to focus on supporting growth rather than fighting inflation.
In the U.S.: Quarterly growth declines from 2.7% to -0.3% amid tariff and sentiment strains
April job gains of 177k beat expectations, with rising wages and low layoffs supporting incomes despite weak consumer sentiment. Tariffs are at unprecedented levels, likely to raise prices and cut imports by up to 30% in H1 2025, though strong household balance sheets help buffer the shock. Auto demand is surging ahead of expected price hikes, while AI investment offsets a broader slowdown in business spending. Core inflation has eased, but tariff effects may reverse this. The Fed is expected to cut rates by 100bps over the next 12 months to support failing growth.
In Europe: 1.2% growth amid weak momentum
Growth is expected to decline to 0.8% year on year as policy uncertainty and tariffs weigh on consumption and investment, but support is likely from German stimulus, rate cuts, and strong household and corporate balance sheets. Inflation is easing and may undershoot the 2% target, reinforcing expectations of rate cuts from the European Central Bank (ECB) toward a 1.75% deposit rate by year-end. Recovery should gradually strengthen with improved policy clarity and easing financial conditions.
In China: 5.4% growth, but tariff risks threaten outlook
China’s Q1 GDP rose 5.4% year on year, driven by front-loaded exports, recovering retail sales, and solid manufacturing investment. Hefty U.S. tariffs starting in Q2 are expected to drag 2025–26 GDP by 1.5%, pushing full-year growth potentially below 5%. Policymakers are responding with RMB 1-3 trillion in additional fiscal stimulus, alongside expected monetary easing measures including a 150bp cut to the reserve requirement ratio (RRR) and 40bps in policy rate reductions. Meanwhile, muted inflation (0% in Q1) provides room for further stimulus to counter external headwinds.
Markets are adjusting to a new risk regime following tariff shocks, with elevated equity volatility but peak uncertainty likely behind us. The perceived “Trump put” reduces tail risks, although tariffs are set to weigh on growth and corporate profits. Fixed income markets saw large price swings, driven by margin calls and cash demand, moving U.S. yields and sparking instability. Foreign selling of U.S. assets has added pressure to Treasury markets. EURUSD has risen to 1.15 as confidence in the USD weakens, with safe-haven currencies like JPY and CHF outperforming. The JPY remains supported amid narrowing rate differentials.
Outlook: Despite higher recession risk, global stimulus and central bank readiness to cut rates should prevent a broad downturn.
Global equities plunged following the announcement of steep U.S. tariffs in early April, but rebounded after President Trump introduced a three-month pause and granted exemptions. This “Trump put” reassured markets, with high-level trade talks and policy relief lifting sentiment. Volatility remains high, but structural themes like AI, digital transformation, and resources continue to support equity markets.
In the U.S.: High equity volatility
The S&P 500 and Nasdaq are down 5.3% and 6.9% YTD, respectively, with volatility up 30% as markets react to policy uncertainty. President Trump’s tariff pause signals a shift toward mitigating economic risks, reducing fears of a deep downturn. This move lowers the perceived probability of a recession. While volatility is expected to remain elevated, markets appear to have priced in much of the tariff impact.
In Europe: Equities sensitive to global slowdown
The Euro Stoxx 50 is up 5.4% YTD, but trade tensions remain elevated and continue to weigh on confidence. While direct tariff impact on European firms is limited, the risk lies in weaker global growth and delayed investment. Slowing U.S. consumption and uncertainty around U.S.-China talks are key risks for European equity performance. Markets will watch global policy signals closely as Europe remains exposed to external demand shifts as well as the Russia-Ukraine war.
In China: Equities resilient amid tariff uncertainty
The Hang Seng China Enterprises Index (HSCEI) is up 10.8% YTD, outperforming the S&P 500 despite persistent tariff and geopolitical pressures. High U.S.-China tariffs remain a major headwind, although temporary policy shifts hint at possible easing. Risks include weaker U.S. growth and falling exports, likely pushing China’s GDP below 5% this year. China is expected to maintain stimulus efforts to cushion the impact and support market stability.
U.S. dollar has weakened 10% YTD against EUR and JPY on Trump’s tariffs
Oversized tariffs have weighed on the USD, and we expect further depreciation driven by Fed rate cuts, a widening fiscal deficit, and persistent trade imbalances—particularly against manufacturing currencies like the RMB and JPY.
With rising FX volatility due to tariff uncertainty, we recommend hedging EUR, RMB, and JPY exposures.
EURUSD near 3-year high at 1.13, up ~10% YTD on broad dollar weakness
EURUSD has risen from near parity to a three-year high of 1.15, as U.S. tariffs eroded confidence in the dollar’s reserve status. While retaliatory trade measures initially triggered broad market sell-offs and USD weakness, EUR downside risk persists due to ongoing ECB rate cuts, weak growth, and the ongoing Russia-Ukraine conflict.
USDRMB declines to 7.21 from 7.37 high as PBoC anchors FX stability
Amid ongoing U.S.-China trade tensions, USDRMB has edged lower from its all-time high of 7.37, as the People’s Bank of China (PBoC) anchors daily fixings. Authorities are expected to limit excessive currency moves, aiming to maintain macro stability in the face of external shocks.
USDJPY at 145 as yen rallies ~10% YTD on tariffs and flight to safety
The Japanese yen rallied sharply after Trump’s broad tariffs, as deteriorating risk sentiment drove safe-haven demand. A narrowing U.S.-Japan rate differential and growing Fed cut expectations added to JPY strength, while USD fell to multi-month lows. With the Bank of Japan (BoJ) signalling potential hikes amid rising domestic inflation, policy divergence points to continued JPY outperformance and downside pressure on USDJPY.
Growth fears have intensified amid Trump’s larger-than-expected tariff hikes, leading markets to price in 100bp Fed cuts over 12 months. Institutional challenges and fiscal fragility have pushed term premia higher and steepened the curve, with the Fed short-term terminal rate expected near 3% and the 10-year Treasury yield above 4.5%. Despite near-term inflation risks, the Fed is expected to prioritize growth. With equities declining year to date in 2025, bonds have outperformed and the bond-equity correlation has turned negative—restoring their diversification benefits.
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: Up 25% YTD to USD 3,500/oz
Gold has soared to a record-high USD 3,500/oz, driven by geopolitical tensions, inflation concerns, and a dovish rate outlook. Speculative demand has surged, with Chinese buying pushing the Shanghai Exchange’s open interest on gold to new highs. USD weakness and Trump’s criticism of the Fed have further eroded confidence in the U.S. dollar. Investors are rotating into gold as a safe haven amid rising macro and policy risks.
Oil: Down 19% YTD to USD 58.2/bbl on macro risks
Trade war fears have pressured oil prices, with rising recession risks driving volatility across financial and energy markets. Crude oil remains tightly supplied, as seen in the backwardated futures curve (i.e. Futures prices lower than spot), but demand concerns dominate. A strong correlation with U.S. equities signals demand-led price action, while tariff uncertainty clouds the outlook.
Copper: Up 15% YTD to USD 10,050 per metric ton on telecom and EV demand
Copper prices have dropped from March highs on tariff-driven demand fears and rising U.S. recession risk while retaining +15% performance YTD. Near-term supply remains tight, while expected Fed cuts and further Chinese stimulus may support prices. Supply constraints should keep a floor under copper, reinforcing the need for investment in new capacity.
