Q1 review
It turned out to be the worst quarter for equity markets since 2022 with much of the sell-off being driven by Magnificent Seven stocks (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla), which have lost more than $2 trillion in market value collectively in Q1. These were the same stocks that led to outsized returns in the previous two years. The S&P 500 was down 4.59% and the tech-heavy Nasdaq Composite plummeted 10.4%. The Dow Jones Industrial Average was 1.28% lower and recorded its first back-to-back monthly loss since October 2023. Although the corporate earnings season was strong, with US earnings delivering 18.2% y/o/y growth and European markets delivering 8.0% y/o/y earnings growth, markets were upended by uncertainty surrounding US tariffs. Following the imposition of new tariffs on US imports from Mexico, Canada and China in February, markets continued to be rocked by the threat of retaliatory tariffs in March. With markets taken aback by China’s DeepSeek disruption of US AI giants like Nvidia, the bullying of Ukrainian President Volodymyr Zelensky by US President Trump into a difficult and tenuous cease-fire agreement with Russia, and the new US administration's policies upsetting their traditional European NATO allies, money flowed back to Europe and UK markets. These markets were also helped in part by fiscal and monetary stimulus and a weakening US dollar. The US administration announcement of new tariffs on steel, aluminium and autos, while shifting expectations around the extent of future tariff announcements caused market sentiment to further deteriorate. Development market equities were, as noted by JPMorgan Asset Management, -1.7% as the overriding tariff uncertainty has dampened growth expectations globally. Fixed Income markets had a mixed and highly volatile performance in Q1, with yields steeping in Europe in particular, causing prices to fall.
The big issue now, is, of course, how the new tariffs, announced at the beginning of Q2 on 2nd April, referred to by President Trump as the US “liberation day”, will hit the global economy.
US Indices for Q1 2025 and YTD
S&P 500 -4.59% Q1 and -3.79% YTD
Nasdaq 100 -8.25% Q1 and -6.99% YTD
Dow Jones Industrial Average -1.28% Q1 and -1.30% YTD
NYSE +1.56% Q1 and +1.89% YTD
According to the S&P Sector and Industry Indices, 5 of the 11 S&P 500 sectors were down in Q1. The best performing sector in Q1 2025 was Energy at +9.30%, followed by Health Care at +6.08%, and Consumer Staples at +4.58%, whereas Consumer Discretionary was -13.97%, and Information Technology -12.79%.
It was a largely negative Q1 for the mega caps, as all members of the Magnificent Seven declined: Alphabet -18.31%, Amazon -13.28%, Apple -11.30%, Meta Platforms -1.56%, Microsoft -10.94%, Nvidia -19.29%, and Tesla -35.83%.
In Q1 Energy stocks were +9.30% due to concerns around tighter supply as a result of US foreign policy; this included further sanctions against Iran and Venezuela. Major stocks were up including Chevron +15.50%, Shell +14.10%, BP Plc +10.97%, ExxonMobil +10.56%, Phillips 66 +8.38%, Baker Hughes +7.14%, and Marathon Petroleum +4.44%, while Halliburton -6.69%, and Occidental Petroleum -0.10%.
Basic materials stocks were +2.30% in Q1. Performance varied widely, with Sibanye Stillwater +39.05%, Newmont Mining +29.72%, Mosaic +9.89%, Yara International +5.02%, and Nucor Corporation +3.11%, while Freeport-McMoRan -0.58%, CF Industries Holdings -8.40%, and Albemarle Corporation -16.33%.
For Q1 2025, the estimated y/o/y earnings growth rate is 7.3%. This would represent the seventh-straight quarter of (year-over-year) earnings growth reported by the index. However, this estimate has been revised downward from 11.7% as of 31st December, primarily due to lower EPS estimates in all eleven sectors. Currently, 68 S&P 500 companies have issued negative EPS guidance for Q1 2025, compared to 39 with positive guidance.
The number of companies issuing negative EPS guidance is above the 5-year average of 57 and above the 10-year average of 62. Additionally, the number of companies issuing positive EPS guidance for the fourth quarter is below the 5-year average of 42 but above the 10-year average of 38.
The estimated net profit margin for the S&P 500 in Q1 2025 is 12.1%. While slightly lower than Q4's 12.6%, it remains above the year-ago margin of 11.8% and the 5-year average of 11.6%.
Sector-level analysis reveals that six sectors are anticipated to report y/o/y net profit margin increases in Q1 2025, led by Health Care (8.3% vs. 6.6%). Conversely, six sectors are projected to experience decreases, led by Real Estate (34.7% vs. 36.2%). Six sectors are expected to report margins above their 5-year averages, led by Communication Services (13.3% vs. 11.8%) and Information Technology (25.5% vs. 24.0%), while five are predicted to fall below, led by Materials (8.5% vs. 11.1%).
Finally, during the week of 7th April, 3 S&P 500 companies are scheduled to release Q1 2025 results.
European Indices Q1 2025
Stoxx 600 +5.18% Q1 and +5.77% YTD
DAX +11.32% Q1 and +12.47% YTD
CAC 40 +5.55% Q1 and +6.48% YTD
IBEX 35 +13.29% Q1 and +15.14% YTD
FTSE MIB +11.31% Q1 and +12.79% YTD
FTSE 100 +5.01% Q1 and +5.65% YTD
As of 1st April, according to LSEG I/B/E/S data for the STOXX 600, Q1 2025 earnings are expected to decrease 1.5% from Q1 2024. Excluding the Energy sector, earnings are expected to increase 1.9%. Q1 2025 revenue is expected to increase 4.2% from Q4 2023. Excluding the Energy sector, revenues are expected to increase 5.1%. Two companies in the STOXX 600 have reported earnings by 1st April for Q1 2024, exceeding analysts estimates. In a typical quarter 54% beat analyst EPS estimates and 58% beat analyst revenue estimates.
Six of the ten sectors in the index expect to see an improvement in earnings relative to Q1 2024. The Real Estate sector has the highest expected earnings growth rate for the quarter at 24.1%, while the Energy has the weakest anticipated growth compared to Q1 2024 at negative 20.0%.
The forward four-quarter price-to-earnings ratio (P/E) for the STOXX 600 sits at 13.7x, below the 10-year average of 14.3x.
During the week of 7th April, 3 companies scheduled to report Q1 earnings.
Analysts expect positive Q1 earnings growth from eight of the sixteen countries represented in the STOXX 600 index. Belgium (28.6%) and Poland (25.1%) have the highest estimated earnings growth rates, while Portugal (-24.8%) and Finland (-18.6%) have the lowest estimated growth.
Global Indices for Q1 and YTD
Hang Seng +15.25% Q1 and +15.67% YTD
MSCI World -3.01% Q1 and -1.57% YTD
Chinese markets recovered in Q1 thanks in part to China’s stimulus measures. These included wage increases for government workers, higher state and local government bond issuance to support real estate and the banking system, expansion of the consumer goods trade-in programme, and an increase to the budget deficit to the highest on record since 2010.
Fixed Income for Q1 and YTD
US Treasuries 10-year yield -36.6 bps Q1 to 4.210% and -44.9 bps YTD to 4.127%.
Germany’s 10-year yield +37.9 bps Q1 to 2.748% and +35.3 bps YTD to 2.722%.
Britain’s 10-year yield +12.1 bps Q1 to 4.689% and +7.9 bps YTD to 4.647%.
The Fed has been on pause since January with the target range for the federal funds rate at 4.25% to 4.5%. The Fed's latest economic projections show slower growth and higher core inflation by year-end. Officials still expect to cut borrowing costs twice this year, according to their latest economic projections, though eight officials are predicting one or no cuts this year, compared to only four who expected that in December. The FOMC is also concerned about the impact of tariff policies on US growth and inflation in addition to other policy changes such as mass deportations and a downsizing of the federal workforce.
In Europe fixed income investors were forced to adjust their portfolios in Q1 as revised government spending and debt plans sent longer-term yields rising and prices falling. The eurozone has seen benchmark yields continue to steepen through Q1, particularly following the passing of a new defence and €500bn infrastructure spending plan in Germany, pushed through by Chancellor-in-waiting Friedrich Merz, leader of the Christian Democratic Union (CDU). The 10-year German Bund yield rose by more than 30 basis points on the day of the announcement, with borrowing costs in other eurozone member states also rising over the quarter. The legislation removed the debt brake and changed the fiscal rules, allowing for a record level of state borrowing for defence and infrastructure. The European Central Bank (ECB) was positive about the prospect of further fiscal stimulus ahead. Eurozone interest rates were cut twice in Q1, with a further 60 basis points of cuts priced by markets by the end of 2025.
In the UK, there was a sell-off of gilts at the beginning of Q1 with the yield on the 30-year gilt hitting levels last seen in the late 1990s. The 10-year gilt jumped to levels last seen during the financial crisis in 2008. At its meeting ending on 5th February 2025, the MPC of the Bank of England (BoE) voted by a majority of 7–2 to reduce Bank Rate by 25 bps to 4.5%. However, at its 19th March meeting it voted 8 to 1 in favour of maintaining the Bank Rate at 4.5%. Although it did leave the door open for further rate cuts this year, Governor Andrew Bailey stated that officials are being forced to react to “fast-moving” global events, with the effects on inflation and growth far from certain. With wage growth remaining robust, as evidenced by the annual growth in average weekly earnings, excluding bonuses, holding at 5.9% in the three months to January, and wage growth, including bonuses, edging down only slightly to 5.8% from 6.1% in the three months to December, the BoE faces persistent inflationary pressures alongside a stagnating economy as employment increased by just 0.1 per cent over the year to January. With the introduction of tax rises on businesses in April, the growth forecast was downgraded by the Office for Budget Responsibility (OBR) to only 1% in 2025, half of the forecast last October. The OBR did upgrade the growth forecast to 1.9% in 2026, 1.8% t in 2027, 1.7% in 2028 and 1.8% in 2029, but this was before 10% tariffs against the UK were announced on 2 April.
Commodities in Q1 and YTD
Gold spot +18.77% Q1 and +19.43% YTD to $3,134.26 an ounce.
Silver spot +17.82% Q1 and +19.67% YTD to $33.72 an ounce.
West Texas Intermediate crude -0.33% Q1 and -1.68% YTD to $70.23 a barrel.
Brent crude +0.13% Q1 and -1.76% YTD to $73.35 a barrel.
Gold markets ended Q1 having reached 19 new record highs, reaching and remaining above the psychologically important $3,000 mark. Spot gold was +18.77% in Q1 and is +19.67% YTD, outperforming all major asset classes. The key drivers for gold in Q4 were central bank purchases offsetting any drops in consumer demand, rising geopolitical risk, and growing concerns around rising inflation following Trump’s election and the potential implementation of tariffs. In addition, Fed rate cuts have contributed to higher net speculative positions in gold and increased holdings in gold ETFs.
According to World Gold Council data, flows of global physically backed gold ETFs turned positive in December, adding $778 million. Net speculative positions in gold futures and options have risen significantly since Q4 2023.
The outlook for crude oil in 2025 worsened in Q1 as US tariffs and slowing economic growth in India and China weighed on demand, while OPEC+ pushed forward with plans to increase output from April. In addition, US increasing sanction pressure on Iran and threatening countries importing oil from Venezuela contributed to overall market uneasiness.
Although OPEC’s forecast sees global oil demand rising by 1.45 million barrels per day (bpd) in 2025 and 1.43 million bpd in 2026, these forecasts do not include the actual impact that the newly announced tariffs could have on this trajectory as they are likely to trigger a global economic slowdown and drive up global inflation.
Note: Data as of 5 pm EDT 2 April 2025
Regional news
The USA
February saw core PCE inflation rise by 0.4%, significantly exceeding the 2% annualised target, while annual inflation came in at 2.80% in February from 3% in January of 2025. Simultaneously, real consumer spending edged up by a mere 0.1%, compounded by a revised 0.6% decline in January. That came as personal income posted a 0.8% rise, against the estimate for 0.4%.
This subdued consumer spending figure stands in contrast to observed income growth, prompting two interpretations. Optimistically, this could signify a natural slowdown after strong Q4 2024 spending, potentially exacerbated by winter weather. Conversely, it suggests that declining consumer confidence is beginning to impact spending habits. The upcoming March data will be crucial in clarifying which interpretation holds true, as weather-related distortions are unlikely to persist.
With inflation remaining above target, even before the full impact of tariffs, the weak consumer spending data may allow the Fed to consider rate cuts. This would aim to mitigate the risk of a more significant economic downturn. Given the prevailing uncertainties in trade policy, the potential range of Fed funds rate outcomes for the year remains considerably wide.
Q1 saw US equities face significant headwinds, with the S&P 500 experiencing a decline exceeding 4.5%, marking its largest quarterly drop since Q3 2022. March proved particularly challenging, witnessing a 5.5% decrease, the most substantial monthly fall since December 2022.
A key factor weighing on market sentiment was the Trump 2.0 policy uncertainty, especially concerning tariffs, which created anxieties among corporations and consumers. Concerns about stagflation, intensified by the prospect of tariffs, further contributed to market unease. This was reflected in the Fed's March Summary of Economic Projections (SEP), which lowered the median 2025 GDP growth forecast by 0.4 percentage points to 1.7% and raised the median 2025 core PCE inflation forecast by 0.3 percentage points to 2.8%. The market was also taken aback by the White House's emphasis on Main Street over Wall Street, suggesting a less pronounced ‘Trump put’ than anticipated.
The underperformance of the Magnificent Seven stocks was a prominent theme throughout the quarter and particularly in March. This was partly attributed to increased scrutiny of the AI-valuation and US exceptionalism narratives, fuelled by the DeepSeek breakthrough. Additional bearish factors contributing to the market's decline included technical deterioration, with the S&P 500 and Nasdaq Composite falling below their 200-day moving averages, the absence of significant market capitulation despite record inflows into US equities, perceived Fed resistance to preemptive rate cuts, and potential risks to what’s been a relatively stable 2025 consensus earnings estimate.
The eurozone
The European Central Bank continued its rate cuts in Q1, reducing rates in January and early March as expected. However, with inflation still above target and new promises of increased defence spending by eurozone member states, with Germany in particular promising to invest €500 billion into infrastructure and defence, the previously poor growth outlook looks much rosier, perhaps reducing the need for the ECB to continue to cut rates at speed.
BlackRock data, as reported by Reuters, reveals a record $10.6 billion influx of US investor funds into European-focused ETFs during Q1, a sevenfold increase compared to the previous year. This resurgence of interest in European markets represents a significant shift, following net outflows after Russia's invasion of Ukraine in February 2022. Notably, in three of the last five years, US-based investors had largely favoured domestic funds over European ETFs.
Equity strategists suggest that while investors are not divesting entirely from US equities, they are recognising the diversification benefits of international investments, with Europe emerging as a prominent beneficiary. This trend aligns with broader market flow data and the widely observed Bank of America (BoFA) fund managers' survey. Consequently, European equity markets have outperformed year-to-date, with defence stocks particularly benefiting from European rearmament initiatives and Germany's substantial fiscal stimulus. However, analysts have cautioned that Europe's export-driven economy makes it vulnerable to global growth dynamics and ongoing global trade policy uncertainty.
According to Reuters, PIMCO anticipates that the EU is likely to initiate another joint borrowing programme to finance defence spending through grants to member states. This projection arises from the resistance of southern European nations to the EU's proposed defence spending plan, which relies on low-interest loans, as they fear exacerbating their existing debt burdens. These countries advocate for a funding mechanism similar to the post-COVID-19 recovery fund, where the EU issued bonds and distributed grants. EU Commission President von der Leyen has proposed a €150 billion joint loan package.
Furthermore, the UK has presented a proposal for a joint European fund dedicated to the procurement of weapons and equipment. The informal paper, authored by UK officials, outlines a multilateral fund that would secure market loans at favourable rates to support defence expenditure. This fund would be backed by equity and sovereign guarantees. While the paper does not specify a precise funding amount, it is estimated to reach hundreds of billions of euros, aiming to address the current defence financing shortfall.
Performance across European equities was notably positive. France's CAC 40 was the weakest performer, rising by +5.55%, additionally, Spain's IBEX rose by +13.29%, while Germany's DAX index increased by +11.32%. Q1’s quarterly European outperformance over its US peers was the strongest in 20 years.
In Q1, sector performance exhibited a distinct bias towards sectors that would benefit from increased government spending, and sectors that are less isolated to trade frictions. Sector-wise, Stoxx Euro 600’s top performers included Banks +21.50%, Insurance +15.71%, Telecom +12.65%, Oil & Gas +9.95%, and Construction & Materials +7.03%. Conversely, Technology -3.15%, Autos & Parts -4.45%, Basic Resources -4.56%, Retail -4.74%, and Travel & Leisure -13.90% lagged behind.
The Granolas in Q1: GSK +8.58%, Roche +6.49%, ASML -10.71%, Nestlé +19.31%, Novartis +10.30%, Novo Nordisk -24.74%, L'Oréal +0.29%, LVMH -10.04%, AstraZeneca +7.51%, Sanofi +8.73%, and SAP +3.43%.
The UK
The Bank of England showed more caution than the ECB, cutting rates in February only. UK rates now sit at 4.5% with the BoE governor Andrew Bailey noting during its last meeting on 19th March, “we still think that interest rates are on a gradually declining path. We’ll be looking very closely at how the global and domestic economies are evolving at each of our six-weekly rate-setting meetings.”
The UK economy continues to be plagued by concerns around stagnation due to a combination of strong wage growth and sluggish hiring. The S&P Global Composite PMI registered 51.5 in March 2025, revised down from the preliminary estimate of 52.0 but still above February’s 50.5. Service sector growth came in at 53.2, up from February’s 51.0 and a 7-month high. However, the Manufacturing PMI for March was at the lowest reading in 17 months, to 44.9, down from 46.9 in February. However, due to a deterioration in the fiscal outlook, UK Chancellor Rachel Reeves was forced to announce during her Spring budget statement new spending cuts of £8.4 billion to comply with the government’s fiscal rules. Despite the signs of a slowing economy and worries that the UK’s fiscal headroom could easily be breached, benchmark 10-year Gilt yields ended Q1 just 10 basis points above where they started. However, UK bond investors are likely to be cautious until the Autumn budget when the impact of tariffs on the UK economy are better known. UK equities also outperformed many other regions year-to-date, with the UK FTSE All-Share +4.5%.
Asia ex-Japan
During Q1, despite the recent imposition of new US import tariffs, Chinese equities demonstrated signs of renewed strength. This positive performance is largely attributed to robust ‘bottom-up’ developments, particularly the DeepSeek AI breakthrough, which has reinforced perceptions of China's advanced technological capabilities. The convergence of emerging AI technologies with comparatively low valuations underscored the growth potential of Chinese stocks. Similarly, the Indian stock market appears poised for recovery following its recent correction. The substantial decline in valuations has brought them closer to historical averages, presenting potentially attractive entry points for investors.
Consequently, the Hang Seng index registered a 15.5% increase in Q1. Similarly, the FTSE Singapore and South Korea's Kospi indices also recorded positive performance, with gains of 5.33% and 3.40%, respectively. Conversely, the broader MSCI Asia index concluded the quarter with a 0.93% decline, and the FTSE Taiwan index experienced a notable underperformance, falling by 11.69%.
Currencies
The US dollar had a volatile Q1, with the US Dollar Index ending the quarter down -3.94%.
In contrast, the euro experienced a rise throughout the latter part of Q1 due to a better economic outlook after Germany reformed its ‘debt break’. It was +4.45% against the USD during Q1, while the GBP was +3.23% in Q1. The Japanese Yen rose +4.89% against the US dollar in Q1.
Following a period of strength early this year, which saw the US dollar ascend to a two-year high on a trade-weighted basis, there has been a pronounced counter-movement. This shift in the dollar's trajectory can be attributed to three primary factors: Firstly, trade tariffs have emerged as a dominant market theme, generating significant volatility and focussing investor attention on the potential adverse impacts of import duties on the US economy. Secondly, the release of unexpectedly weak US economic soft data, particularly relating to consumer confidence, has fuelled market concerns about a potential economic slowdown or even the onset of stagflation. Thirdly, discussions regarding substantial increases in infrastructure and defence expenditures by Germany's potential new governing coalition are fostering expectations of more robust economic growth within Germany and the wider eurozone, thereby lending support to the euro.
Further contributing to the euro's relative strength, recent portfolio adjustments, likely influenced by the divergent performance trends in US and eurozone equity markets, appear to have favoured the single currency. Concurrently, yield spreads between the US and the eurozone have narrowed, and the growth differential between the two economic areas is also projected to contract.
Looking ahead, should the prospective stimulus measures in Germany materialise and prove effective in stimulating economic activity, the euro possesses the potential for continued appreciation against the US dollar over the medium term.
Cryptocurrencies in Q1 and YTD
Bitcoin -11.71% Q1 -9.40% YTD to $84,049.85.
Ethereum -45.36% Q1 -44.28% YTD to $1,846.56.
Crypto markets were down in Q1 despite reaching a peak of almost $110,000 in January as uncertainty over US tariffs including inflation effects and when the Fed may cut rates again, unsettled investors. The overall “risk-off” sentiment has permeated markets despite what promised to be a more favourable regulatory environment following President Trump’s signing of an executive order paving the way for the creation of a Strategic Bitcoin Reserve and an US Digital Asset Stockpile. The total cryptocurrency market cap also dropped, from $3.18 trillion at the start of the year to $2.63 trillion by the end of March. In short, the uncertainty around the speed with which rate cuts will occur, the high volatility across markets, and profit-taking contributed to a weak Q1. However, institutional adoption remains strong and there is increased interest in the issuance of crypto ETFs, primarily aimed at institutional investors.
Note: As of 5:00 pm EDT 2 April 2025
What to think about in Q2 2025
With concerns around trade and other geopolitical frictions, high market volatility is likely to continue in Q2 2025. There are growing concerns around valuations in equity markets given the uncertainties around tariffs and the retaliatory measures that may follow. During his press conference on 2 April, President Trump cited currency manipulation, IP theft and tax practices as just some of the issues trading partners are engaging in and used them as partial justifications for the various new tariff rates.
What could go wrong? During ‘Liberation Day’, the US President unveiled significant new trade policies. This so-called “reciprocal” tariff plan consists of two parts. First, a 10% baseline tariff would apply to imports from all countries excluding Canada and Mexico. This tariff is set to take effect 5 April. Second, it details additional ‘reciprocal’ tariffs targeting 60 specific nations. Notable examples include a 34% tariff on Chinese imports, 32% on Taiwanese goods, a high 46% tariff on products from Vietnam, and a 20% tariff on imports from the EU. North American trading partners Canada and Mexico are also set to face a 25% tariff, although imports that comply with the USMCA trade agreement will be exempt. This second component would take effect on 9 April. Steel, aluminum, and automobiles are excluded from this specific order, as they are already subject to existing 25% tariffs. However, copper, pharmaceuticals, chips, and lumber, while currently excluded, have been identified as potential targets for future tariffs.
As noted by Goldman Sachs, the fact that these two components were structured separately suggests that the 10% baseline tariff is unlikely to be negotiated down, but that the additional tariff rate could decline following negotiation with trading partners.
President Trump justified these varying reciprocal rates by citing alleged non-tariff barriers imposed by other countries, referencing issues such as currency manipulation, Value Added Taxes (VAT), and environmental impacts.
Initial analysis suggests the scope of these tariffs is more severe than many worst-case scenarios had predicted. Barclays calculated that the combined measures effectively represent an approximate 20% weighted global tariff while Goldman Sachs estimates that headline tariff changes would impose a weighted average tariff rate of 18.3%.
The announcement prompted an immediate negative reaction in financial markets during after-hours trading. The S&P 500 index dropped by more than 2%, and the Nasdaq experienced a steeper decline, falling more than 4% at its peak.
Investors cautioned that the White House's proposed tariff levels make international retaliation almost unavoidable, thereby increasing the risk of an escalating trade war. Luca Paolini, chief strategist at Pictet Asset Management, echoed this, predicting ‘Retaliation Day’ will follow ‘Liberation Day’ as governments would look weak otherwise. While anticipating retaliation, Paolini expects negotiation channels might remain open, but he also warned that the comprehensive nature of the tariffs raises the probability of a US recession.
These escalating changes to US trade policy could push the effective US tariff rate to levels reminiscent of the 1930s. For the consumer, this heightened policy uncertainty is driving fears of unemployment, a common precursor to significant labor market deterioration. Even if unemployment does not rise abruptly, consumers might become cautious and reduce their spending as a precaution. This would deter firms from investing, and lead to lower profits and, ultimately, pressure on stock prices. This could create a negative feedback loop, further undermining spending.
Historically, the Fed might have countered such uncertainty by proactively easing monetary policy. However, the risk now is that substantial tariffs could reignite inflationary pressures, potentially limiting the Fed's ability to ease policy until there is clear evidence that a weakening economy is curbing inflation. This scenario suggests an environment characterised by increased volatility and diminished valuations for risk assets, particularly those with tight risk premiums.
In response to these developments, market expectations regarding Fed monetary policy have shifted. Investors are now anticipating a more rapid series of interest rate cuts. According to CME's FedWatch Tool, the market now projects the first rate cut to occur in June, with a total of nearly 73.1 bps in cuts expected by the end of the year, up significantly from the approximately 62.8 bps a week prior.
Liberation Day shock in Asia. The implementation of Trump's reciprocal tariff regime is poised to significantly impact Asian economies, with notably high rates imposed. China faces a 34% tariff, bringing the total tariff to 54%, while Japan, Taiwan, India, South Korea, and Vietnam will see rates of 24%, 32%, 26%, 25%, and 46%, respectively. Adding to the trade tensions, an executive order has been issued, rescinding tariff exemptions for de minimis Chinese goods valued at $800 or less, subjecting them to a 30% tariff or $25 per item.
These tariff measures are expected to ripple through Asian supply chains, driving up input costs for numerous industries. Retailers like Nike and Adidas, with significant manufacturing operations in Vietnam, are projected to be particularly affected. Similarly, Apple, which relies heavily on manufacturing hubs in Vietnam, India, and China, is anticipated to experience a decline in profits, according to analyst projections. The focus now shifts to how affected countries will respond, fuelling the debate surrounding tariffs as a negotiation tool. Trump has signalled that exemptions will only be granted to nations that first eliminate their own tariffs and non-tariff barriers.
The initial reaction from China was that its central bank lifted the daily $/CNY fixing to the highest year-to-date range after yesterday’s worse than expected US tariff increase. The adjustment might look relatively small in absolute terms, but this action serves as a reminder of its response to the 2018 tariff hike, ie. currency depreciation.
Economic and Geopolitical Risk Calendar:
In addition to monetary and fiscal policy changes, there are other factors that could affect market performance in Q2 2025. Geopolitical tensions remain high with President Trump continuing to pressure NATO allies. Despite efforts by Trump to get Russia to agree to a permanent ceasefire in Ukraine, European markets in particular remain at risk. Traders will be focussed on the potential consequences of changes in tariff policies and retaliatory measures as trade frictions are unlikely to be easily settled. They will also be considering sovereign debt levels, market liquidity and potential shifts in tax and fiscal policies in the US.
Other potential policy and geopolitical risks for investors that could negatively affect corporate earnings, stock market performance, currency valuations, sovereign and corporate bond markets and cryptocurrencies include:
April 2025
16-17 April ECB Monetary Policy Meeting. ECB President Christine Lagarde has stated that while the process of disinflation remains “well on track,” the eurozone is particularly exposed to shifts in tariffs, weakening confidence in the ECB’s projections. Although policymakers are likely to be more confident about growth in the euro area following Germany’s removal of its debt brake and its new spending package, continuing US trade tensions, uncertainty over a peace deal in Ukraine and the expected rise in European defence spending, which may be inflationary, may mean that the ECB may only have up to two more cuts this year.
21-26 April World Bank and International Monetary Fund Spring Meetings, Washington, DC. Global policymakers will come together to discuss the inflation outlook, growth trends and wider geopolitical developments.
23-24 April G-20 Finance Ministers and Central Bank Governors Meeting, Washington DC. This is the second G-20 Finance Ministers meeting under the leadership of South Africa.
30 April-1 May Bank of Japan Monetary Policy Meeting. The BoJ held rates at 0.50% in March but expects underlying inflation to converge toward its target. Governor Kazuo Ueda said Japan's recent "very high" inflation was driven mostly by temporary factors such as rising import costs and food prices, which are likely to dissipate and thus not a reason to tighten monetary policy. However, he did make clear that the BOJ will take "stronger steps" if inflation overshoots its projections. Core inflation was at 3% in February.
May 2025
6-7 May Federal Reserve Monetary Policy Meeting. The Fed is widely expected to keep rates on hold at 4.5% during this meeting. It will look to consider the impact that the new tariff regime is having on inflation, given expected increases in input costs as well as impact of a weakening US dollar..
8 May Bank of England Monetary Policy Meeting. With inflation and stagflation concerns growing, there may be more room for the BoE to cut rates again. Although inflation came in at 2.8% in February, down from January’s 3%, this is seen as temporary. Inflation is expected to rise again towards 4% later this year given the tax rises on businesses and on the back of energy and other administered prices.Two rate cuts have been priced in for this year by the market, but much will depend on the implementation of tariffs by the Trump administration and the consequent impact that would have on UK fiscal space, gilt yields and the GBP. The BoE is likely to continue to take a gradual approach given these persistent inflationary pressures.
18 May 2025 Presidential election Poland. Incumbent Andrzej Duda is ineligible for re-election. The election is likely to go to a second-round run-off on 1 June, with Warsaw mayor Rafal Trzaskowski, the candidate for the governing coalition, the likely winner. Trzaskowski’s election would enable the coalition to pursue its agenda, while a victory by the opposition candidate would disrupt its agenda significantly.
June 2025
4-5 June European Central Bank Monetary Policy Meeting. The ECB will likely be looking to see what impact the new US tariff regime, combined with improved growth prospects for the eurozone following a region wide commitment to new defence spending, will have on the inflation outlook.
15-17 June G7 Leaders’ Summit. Canada will host the G7 Leaders’ Summit in Kananaskis (Alberta).
16-17 Bank of Japan Monetary Policy Meeting. The BoJ will be closely monitoring the growth in wages and service price trends. It will also use this meeting to evaluate the impact of US tariffs on the economy.
17-18 June Federal Reserve Monetary Policy Meeting. The Fed will be watching for inflationary pressures from a still relatively strong labour market, from the tariffs introduced in March and April, and for the impact on growth.
19 June Bank of England Monetary Policy Meeting. The BoE MPC may decide that the risks to economic growth are greater from a higher policy than the return of inflation. Given growing stagflation concerns, with businesses likely to become ever more cautious due to the implementation of tax rises in April and consumers being hit by higher energy and other administrative prices, the bank may feel pressured to cut rates at this meeting.
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