Monday Digest
Posted 7 April 2025
Trump’s Liberation Day turns into market rout
Donald Trump’s tariffs upset markets unprepared for their magnitude. The shockingly high “reciprocal” tariffs aren’t a response to “Tariffs charged to the U.S.A” as claimed, but a calculation based on regional trade deficits. This widely panned method is suspiciously similar to the one AI models give when you ask for a simple tariff plan. By some calculations, the new weighted average tariff is 18.5% (versus the expected 15%) due to exemptions – but the sell-off worsened when China retaliated with a 34% tariff on the US. Full-blown trade war between the world’s two largest economies greatly concerned investors.
Growth forecasts have been downgraded, but prospects depend on how policymakers respond. The hope is it’s an opening gambit in trade negotiations – with the extra “reciprocals” up for debate. Markets are wondering whether Trump is for real or for the deal, but Canada and Mexico’s exemptions suggest the latter.
The baseline 10% unfortunately looks set to stay, largely because the US government needs the money. That’s especially true if Trump goes ahead with his promised tax cuts. Tax cuts would numb the pain, but probably won’t live up to last year’s market hype – judging by sharply lower US bond yields. Yields have fallen due to growth pessimism but, with Trump preparing for fiscal expansion, US bonds might need a higher yield to attract international investors – so could rise over the medium-term.
The outlook has worsened, but investors should avoid rash decisions. Markets have ricocheted between complacency and capitulation. That’s usually followed by a steep recovery, as investors recognise that there are factors to dampen the shock. The path to mitigation is clear – negotiations bringing down tariffs – and even Trump has said he’s open to talks. Besides that, the Fed has plenty of firepower and other governments look set to pursue fiscal stimulus. It looks like we’re close to the turning point, but there certainly could be volatility ahead. Once the dust settles – and only then – can we evaluate the long-term opportunities to change asset allocations.
March 2025 asset returns review
March was a bad end to a volatile quarter: global stock prices fell 6.3% and bonds dropped 0.4%, as investors braced for President Trump’s “Liberation Day” tariffs. US stocks once again performed the worst (down 7.9% in sterling terms) while the dollar continued to slide. Normally, the dollar rises when global growth is under threat – but markets saw tariffs as a bigger risk for the US than elsewhere.
Looming tariffs still hurt other regions, just not by quite as much. European stocks fell 3% in March – but are up a very decent 7.4% for Q1. The UK followed the same pattern (-2% in March, +6.1% in Q1), despite Spring budget negativity. China was once again the best performer, and now leads returns on a monthly, quarterly, half-yearly and yearly basis – thanks to Beijing’s economic stimulus and tech positivity from DeepSeek.
Bond prices fell, but with significant variation. European yields soared after Germany’s proposed reform of the constitutional debt brake – leading to the biggest single-day yield jump since reunification. Global yields felt the shockwave, but it was dampened in the US, whose yields were only slightly higher through March. That’s because of Trump’s disruptive policies weighing on growth expectations. Yields fell sharply into the end of the month, as investors seemed to prefer the safety of bonds over risk assets.
Lower risk appetite was also reflected in gold prices. The ‘safe haven’ metal continues to soar, and was accompanied by a fall for Bitcoin. That tends to suggest nervous investors. The reason for these nerves was clear: Trump tariffs imposed at the start of April. Uncertainty around these, combined with portfolio rebalancing into the end of the financial year, led to markets bracing for impact.
The new US Sovereign Wealth Fund
Trump’s cabinet is finalising its plans for a US sovereign wealth fund (SWF). The president’s executive order to propose one was light on details, but SWFs are generally built out of budget surpluses – and the US runs a hefty deficit. The government will have to get creative with its money, but there are options: land, gold reserves, cryptocurrencies, mineral rights and stakes in private companies. In fact, there are already 21 SWFs belonging to US states, with a combined $300bn AUM. The idea of a federal SWF isn’t new; Biden proposed one, though nothing came of it.
A Trump-ordered SWF would likely focus on infrastructure, manufacturing and defence – in-keeping with the “America First” policy of winning the tech race and bringing back American manufacturing. A SWF that buys up innovative companies and profits from them could also be a way of giving the fruits of US growth back to its citizens.
Without strong governance, though, SWFs can devolve into slush funds. Worryingly, the Trump administration has little regard for governance or oversight. The president made millions off of his personal ‘memecoin’ just before entering office, while Elon Musk is overseeing the federal funding that he’s profiting from.
Some have suggested tariffs could fund the SWF. This idea is implausible (the deficit still needs plugging) but revealing: it suggests Trump’s SWF is more of a political tool – a weapon in Fortress America – than an investment vehicle.
Global SWFs are increasingly partnering with international funds – so Trump’s SWF could be used in foreign policy. If it comes about, it will probably be a part of Russia talks. The head of Russia’s SWF is now special envoy for investment and cooperation and has said Trump’s presidency “opens up new opportunities for resetting relations”.