The end of the beginning?

The three things investors need to know this week

1. The White House may have backtracked on some tariffs, due to market pressures, but we aren’t back to “normal”. Business uncertainty will likely persist for the medium term. 
2. Having said that, we now know that markets will “check” some of the White House’s decisions.
3. Dollar aversion persists, but we should note that it’s still the “fast money” behind it.

Executive Summary

Market pressures, especially rising borrowing costs, have led the White House to backtrack on some of the more aggressive parts of its agenda. Some tariffs are now postponed or off the table, and the President for now, has softened his approach to the Federal Reserve. This has caused equity markets to rebound. Having said that, we are far from “normality”. Pressures on Dollar assets and borrowing costs remain. But where markets are used to volatility, businesses want more certainty to plan ahead. They will likely not get it anytime soon. The geopolitical fight for global economic supremacy between the US and China remains the larger theme, and it is entering its most volatile phase to date. Even if the White House completely scaled back tariffs, much larger forces are now in play that will define economic growth and inflation, possibly for years to come.

The past few days have calmed a lot of nerves in the market. The White House continued to downplay tariffs and focused on positive trade discussions with Japan and India, while the situation with China somewhat de-escalated.  Some reprieve on auto parts and semiconductors was also granted. Meanwhile, the President’s attacks on Fed Chairman Jerome Powell and the Federal Reserve were retracted. More importantly, markets cheered what they perceived as an elevation of Mr Bessent, the Treasury Secretary, to a more central role in the administration.

So equities rebounded in the past few days, and have now covered 75% of their post-2 April (“Liberation Day”) losses and two-thirds of their losses from their January highs.

And what we now know, that we were not too sure about a few weeks ago, is that the US is not averse to some dollar depreciation, but not at the expense of sharply rising borrowing costs. In essence, markets are now checking US policy, and suggesting that there are limits to the disruption they are willing to tolerate. Especially when the government is faced with $8tn of debt that needs refinancing plus $2tn of new debt that needs to be issued (nearly a third of GDP). 

So are we back to “normal”?

Not in any interpretation of the word.

US large-cap companies are still 15% down for the year. Meanwhile, even after the correction, the US is again trading at a 13% higher-than-average valuation.

De-dollarisation, a general selloff of Dollar assets also persists on most levels, with US yields remaining elevated, and the US Dollar index down 10%.

Having said that, we have not seen stress in the US bond market, as demand for issuance of new debt remains robust.

More importantly, global business uncertainty remains very high. Shipments from China have collapsed as the world’s two largest economies remain at an effective standoff.

The International Monetary Fund (IMF) significantly downgraded US and global growth last week, and upped its inflation targets. A consensus of economists polled by Bloomberg also expects slower growth and higher inflation. Meanwhile, JP Morgan insists on its 60% US-recession probability call while Apollo Asset Management believes that the probability is around 90%.

What we must appreciate is that the conditions which brought us to this point are still relevant. The US, suffering from growth more sluggish and unequal than its electorate would wish for, opted to intensify global strategic competition, especially with China which it probably correctly sees as the main competitor for growth and influence. The White House still sees dollar devaluation and deregulation as key drivers of their wider business plan, even if they are not willing to risk much higher borrowing costs.

But this aggressive policy stance has caused markets to question their assumptions about the world’s safest assets. Even if tariffs were completely repealed today, investors and businesses now have legitimate questions.

• Will the Fed, which effectively underwrites the global dollar-based financial system be allowed to remain independent?
• Will US Dollar foreign investors be taxed on their holdings?
• Will tariffs be back on the table at unexpected intervals?

Markets are used to a modicum of volatility. Equity investors especially, see retrenchments as buying opportunities. Bond investors are less used to volatility, but hedge funds, algorithmic trading and leverage are present even in the vast US Treasury bond markets. Investors have ways to handle volatility, and they know that, when conditions tighten too much, the central bank can act as a lender of last resort, alleviating market pressures.

Unfortunately, non-financial businesses don’t have any lenders of last resort. Businesses need a modicum of clarity to operate efficiently, forecast sales, make supply chain decisions etc. Not all business owners are happy with extreme uncertainty and volatility, whether they are incumbents, challengers or simply just in competition. As days pass, many businesses might just bite the bullet and assume the worst, high tariffs remaining, and act accordingly: be it raising prices (like Sony did with PS5 across the board), resetting their supply Chains (as Apple is doing with India), moving their business somewhere else etc. UPS already announced the firing of 20,000 employees due to an anticipated slowdown in Amazon packages.

The White House scaling back tariff threats on the Fed is welcome news, to be sure. But we can’t assume that those will not repeat themselves. And even if they don’t, after three months of very high uncertainty, much larger forces are now in play, that will define economic growth and inflation, possibly for years to come.

Cliché as it may sound, after the first 100 days of the new US government, it is clear that we are not seeing the beginning of the end, but at best, the end of the beginning.

Market update

Following a turbulent few weeks, the major equity markets returned positive figures this week, with global equities showing a +3.6% increase. The predominant narrative that led to positive figures and a less negative market sentiment was some indications of US and China trade tension de-escalation. US equities saw the greatest rebound of +4.2%, followed by +2.6% in EU equities, +2.1% for EM, +2.8% for UK and +1.3% for Japan (all in GBP terms) by Friday close. Gains in overseas markets were somewhat diminished when considered in Sterling terms as GBP strengthened against USD, EUR and JPY by +0.2%, +0.5% and 1.2% respectively.

In the fixed income space, the US and UK 10-year bond yields decreased by -8 basis points and -9 basis points last week amid growing expectations of an economic slowdown (bond prices and yields move in opposite directions).

Finally, commodities such as gold and oil saw a decrease last week, where gold, after persistent climbs in its price, dipped by -0.6% due to some easing of uncertainty around tariffs, while oil dropped by -2.2% due to oversupply and recession concerns.

Macro news

On Tuesday (29 April) we hosted the Economy and investment webinar - tariff special– the focus was on the economic impact both of the tariffs and the wider Trade War, as well as likely scenarios from here and how we can help clients navigate the turmoil.

The IMF slashed 2025 growth forecasts for the US (1.8%), Japan (0.6%), China (4%), Euro Area (0.8%), and others, as a consequence of high US tariffs and trade tensions. Global growth is projected at 2.8% for 2025, down 0.5% from January. Inflation is expected to remain elevated (4.3% in 2025), complicating monetary policy. "We are entering a new era as the global economic system that has operated for the last 80 years is being reset," IMF chief economist Pierre-Olivier Gourinchas told reporters.

UK growth projections for 2025 were revised down from 1.6% to 1.1%, and down 0.1 percentage points to 1.4% for 2026. The UK’s inflation forecast for 2025 was hiked by 0.7 percentage points, to 3.1%.

Despite his frustration that the central bank is not moving more quickly to cut interest rates, President Donald Trump said he has no intention of firing Federal Reserve Chairman Jerome Powell. “I have no intention of firing him. I would like to see him be a little more active in terms of his idea to lower interest rates”, Trump told reporters on Tuesday. Markets reacted positively to the comments, with stock markets reversing declines that followed the president's statement last Thursday that Jerome Powell's "termination" as Federal Reserve chairman "couldn't come soon enough".