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Global Markets & Economy Adjust to US Tariff Shock

May 02, 2025Global Markets & Economy Adjust to US Tariff Shock

What was Announced?

President Trump has declared that import duties will be raised significantly. Beginning on April 5, all imports will be subject to a "baseline" tariff of at least 10%; starting on April 9, there will be higher "reciprocal" rates for specific trade partners thought to have excessive tariff or nontariff barriers.

Chart 1: Trump's Reciprocal Tariffs
image
Source: Scotia, Bloomberg

Chinese imports will be subject to 34% of the proposed tariffs (54% including already announced tariffs), followed by Japan at 24%, and the European Union at 20%. The President extended an invitation to engage in negotiations with trading partners.

China responded this morning by imposing a 34% tariff on all US imports. They also declared additional restrictions on the export of rare earth materials. These tariffs will go into effect on April 10. The European Union is also expected to retaliate with their own duties on US imports and potentially on services as well.

Market Reaction

The announcement has caused risk assets to respond negatively; since the tariff announcement, global shares have dropped by more than 8%. Investors are more concerned about growth threats than the inflationary effects of tariffs, bond yields moved lower. The US 10-yr Treasury yields were down below 4% for the first time in 6-months, while the two-year yield stood at 3.58%. It's interesting that while the euro and sterling have strengthened, the US dollar has weakened. Commodities have also taken a big hit with oil down as much as 13%. Interestingly, gold has also corrected 1.8% since the announcement.

Near term market direction will depend on how the US trading partners respond to these tariffs. We anticipate more market volatility in the near future.

The announced and already-implemented tariffs will jeopardise global growth. The probability of a US recession has jumped to around 60% over the next 12-months. Economists’ estimate the tariffs could hit global output by up to 1-1.5% over the next year.

Opportunities in a Choppy Market

We observe the following opportunities in a difficult financial market situation, especially with regard to risk assets:

As highlighted in the note we circulated last month, European equities are better placed compared to their US counterparts. With several European countries announcing a bazooka fiscal package, the backdrop for European earnings looks bright. Even before the most recent 10% fall, valuations were still reasonably low, and investor positioning was still light. An added boost comes from a central bank that stands ready to cut interest rates. Of course, the impact of tariffs could start to chip away at the region’s competitiveness, but above noted factors will limit the drag.

Investors in the US should concentrate on quality companies with consistent & stable dividend profiles, as these are typically found in lower beta sectors including consumer staples and telecom services.

The US dollar has been the envy of the world over the last ten years and has historically benefited from political unpredictability and foreign investor flows into US assets; currencies like the Swiss franc and Japanese yen typically perform even better and are better prepared for negative momentum. Curiously, after the tariff announcements, higher beta currencies like the euro and pound both saw gains of up to 3%.

Other safe-haven assets that investors might think about holding are US Treasuries and gold.Gold is a good diversifier for multi-asset portfolios and has demonstrated that it can continue to serve as a hedge against geopolitical risks. The demand from central banks and retail investors should keep the price of yellow metal high in the near future, even though gold prices have arguably reached new highs recently. We also favour US Treasuries as a good diversifier to ongoing policy uncertainties and global slowdown.

Final Thoughts

Before everything calms down, there may be more twists and turns ahead, and visibility for investors will be limited in the near term. We expect more investment opportunities to emerge in the coming weeks and months. For the time being, investors should continue to exercise discretion and refrain from bottom fishing. In rapidly shifting market conditions, investors may benefit from constructing a portfolio that isn't overly dependent on any one asset class or region.

Disclaimer

This document has been produced solely for information purposes by Wealthfusion Limited with the greatest of care and to the best of its knowledge and belief for use by its legal entities. The information contained herein constitutes a marketing communication and should not be construed as financial research or analysis, an offer, a public offer, investment advice, a recommendation or solicitation to buy, sell or subscribe to financial instruments and/or to the provision of a financial service. Further, this document is not intended to provide any financial, legal, accounting or tax advice and should not be relied upon in this regard. The information provided herein is for the exclusive use of the recipient and may not be reproduced, disclosed or distributed, neither in part nor in full. This document is not directed at, or intended for distribution to or use by, any person or entity domiciled or resident in any jurisdiction where such distribution, publication, availability or use would be contrary to applicable laws or regulations of such jurisdictions. Any investment decision must be based on a prior study of the offering documentation and in particular the terms and conditions and key information documents. This information can be obtained on request and will be free of charge from your relationship manager. The content of this document is intended only for persons who understand and are capable of assuming all risks involved. This document has been prepared without taking into account the investor classification, specific investment objectives, financial situation, tax situation or the needs of the recipient. Products and services are not suitable for all investors and may not be available to investors residing in certain jurisdictions or with certain nationalities. Before entering into any transaction, the recipient should consider the suitability of the transaction to individual circumstances and objectives. Wealthfusion Limited recommends that investors independently assess, with a professional financial advisor, the specific financial risks as well as the legal, regulatory, credit, tax and accounting consequences. Investment products may be subject to investment risks involving, but not limited to, possible loss of all or part of the principal investment. This document is not intended to be exhaustive on all risks related to financial instruments. Therefore, the recipient should consult the specific product documentation and discuss any queries with their relationship manager prior to entering into an investment decision. The information and views expressed at the time of writing are subject to change at any time without notice and there is no obligation to update or remove outdated information. Historical data on the performance of the securities and financial instruments or the underlying assets in this document is no indication for future performance and the value of investments may fall as well as rise. This document is based on publicly available information and data. Although information in this document has been obtained from sources believed to be reliable, Wealthfusion Limited provides no guarantee with regard to the timeliness, accuracy or completeness of the information and does not accept any liability for any loss and/or damage, either directly or indirectly, arising out of or in connection with the use of all or part of this information or from the omission of certain information. Recipients should be aware that the terms and conditions and key information documents constitute the sole binding basis for the purchase of investment funds. Some investments may foresee restrictions to target group of investors.

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