Tuesday Digest
Posted 6 May 2025
Markets cheer US policy stabilisation
It was a good week for markets, despite a negative US Q1 GDP and mixed Mega Tech earnings reports. The GDP print caused a selloff in early Wednesday trading, but strong earnings from Meta and Microsoft precipitated a recovery on the day. Apple and Amazon’s earnings were weaker, but all projected solid capex plans.
Encouragingly, implied market volatility has dropped in the last few weeks, thanks to more conciliatory tones from US treasury secretary Scott Bessent – markets’ favourite member of Trump’s cabinet. His prominence since the US bond selloff last month has eased fears that the less market-friendly elements of the Trump administration rule the roost. Given Trump’s negative approval ratings, Bessent’s prominence will hopefully continue.
The contraction in Q1 US GDP was down to increased imports ahead of tariffs (imports are subtracted from domestic sales). Counterintuitively, that might mean higher growth when imports fall later on, even though it signals weaker demand. As such, it’s more important to watch employment data – like the surprisingly strong April jobs report. Other jobs data has been mixed, suggesting companies are neither hiring nor firing. The Federal Reserve will focus on that data, and markets expect more interest rate cuts only by the year end – starting in July.
Longer-term rate projections have actually moved up – suggesting stronger growth 18-24 months from now. That would require more policy stability, of which there were some signs last week: US-India talks, Ukraine mineral deal, Germany’s coalition agreement. It also requires more dovish central banks, which is probably a safer bet, with the Bank of England set to cut rates next week.
The fact it only took a couple weeks of Trump quiet to calm markets suggest that investors see global growth as fundamentally strong and the president as fundamentally pro-growth. Whether that stability can continue – once policy disruption filters through to the economic data – remains to be seen.
April 2025 asset returns review
April was one of the most turbulent months for markets since the 2008 global financial crisis. Most stock markets are down at the end of it in sterling terms, but the slight rise in bond prices cushions some of the portfolio losses.
Trump’s “Liberation Day” tariffs started the equity selloff, and losses mounted once Europe and China retaliated. Volatility eventually spread to US government bonds, due to highly leveraged investors (pension funds) needing to sell to meet margin calls. After Trump backed down, bond markets calmed, liquidity returned and hence a “buy the dip” mentality took hold. Even so, US stocks are the worst performers year-to-date in sterling terms, down 10.9%.
That is exacerbated by the falling dollar. Higher US yields – and a European interest rate cut – would normally push up the US currency, but investors are questioning how safe a haven the dollar is. European stocks are benefitting from this rotation – and were one of the few positive performers in April. The UK declined slightly by comparison, but is still up 5.4% year-to-date. This is partly down to looser monetary policy and partly because markets think Trump will cut trade deals with Britain and Europe.
China’s tariff prospects are worse, after a tit-for-tat escalation that has left sky high tariffs in either direction, making Chinese stocks April’s worst performer, even if they are still up for the year. Investors like Beijing’s domestic stimulus plan, but do not like it playing hard ball on trade. Markets still expect lower US-China tariffs than currently in place, but that requires thawing of relations.
April ended with US GDP release showing the economy contracted in Q1. That was down to America’s import rush (imports are subtracted from domestic production) ahead of tariff imposition, but the worst part is that it signalled both weaker growth and higher inflation. Hopefully, these clear impacts rein in Trump’s wilder policies.
Emerging markets caught in trade war crossfire
Last month’s International Monetary Fund (IMF) and World Bank Spring Meetings gave interesting insights into emerging market prospects during Trump’s trade wars. EMs are usually export led and therefore sell more to the US than they buy – which is why many were hit with high “reciprocal” tariffs.
This has caused a sharp pick up in EMs’ corporate credit spreads (the difference between US bond yields and EM corporate yields). A falling dollar would normally help reduce the debt burden, but this year’s decline in the dollar has been counteracted by credit spreads.
EMs do come into this difficult period in better financial shape, though. While credit spreads have increased, underlying credit ratings are higher than crises past. The IMF’s long-term support has had a big role in this, not only agreeing loans but working on financial stability – which is why many EM central banks have scope to cut interest rates. These improvements are why many EM investors haven’t abandoned EM assets altogether – as you might expect in a ‘risk off’ phase – but are instead being selective, according to JPMorgan’s survey of EM investors.
Unfortunately, IMF support for EMs is probably one of the reasons Trump considers such trade bodies anti-American. The Bretton Woods institutions cannot exist without US support – not only due to US funding but because the “Washington consensus” means nothing without Washington’s consent. One only need look at the World Trade Organisation (WTO), which has lacked a full appellate board since Trump’s first term and is effectively toothless. EMs would struggle if Trump gutted the IMF, but thankfully US treasury secretary Scott Bessent has suggested reform rather than destruction.
Unfortunately for EMs, we don’t know if Bessent’s reformist trade approach will win out in Trump’s cabinet. But they are at least better prepared for this turbulence than in the past.