Quick takes on Trump 2.0

12 Mar 2025

The second of April is not that far away. This is the day the Trump administration will decide upon which countries to impose the next wave of tariffs. Dubbed “reciprocal tariffs,” the US president is justifying his actions as just a way of equalizing the tariffs charged on US exports and imports into various countries. When it comes to the EU, the question of cars is always mentioned: Who hasn’t heard by now that a 2.5% tariff is charged on cars sent to the US from the EU, but coming the other way the tariff is 10%. Lost in the discussion is the fact that the US charges a 25% tariff on the import of pick-up trucks.

What could reciprocal tariffs look like? Despite the claims, the reality is that the existing tariffs on EU-US trade are extremely low. It is hard to get a precise estimate on the number, but the EU believes that the effective tariff rate is around 1%.¹ Some estimates put the number as high as 3%, but even this is a very small figure. Thus, in theory, if reciprocal tariffs are put in place—by both sides—it would be hard to imagine that the effective tariff rate could be that far from 5%.

This may well end up as the effective tariff rate post 2 April. If so, while this would harm EU exports, we do not see it as catastrophic nor having a meaningful impact on economic growth. However, in these highly uncertain times during which tariff policy seems to change every day, we need to be alert to the possibility that tariffs may be heading a lot higher. Already there has been talk of taking into account the VAT that is charged on US goods sold in Europe (the fact that this is also charged on domestic goods seems to be glossed over). How to account for perceived tax discrepancies is hard to know. And then there is the issue of non-tariff barriers, which are, even at the best of times, almost impossible to estimate to any degree of certainty. The likely solution? Perhaps rather than go through the details, the US administration may prefer to opt for a large, simple number—say, 25%?

If such an increase in tariffs were to be announced and, crucially, sustained, the economic impact would likely be larger. If we assume that the US administration follows the pattern of previous tariff announcements, making them large and focused on important sectors, the effective tariff rate would be less than 25%. Knowing which sectors are deemed important to the US administration is a question only it can answer. However, given that President Trump’s initial gripe with EU trade seems to be focused on the trade surplus the bloc enjoys, and if we assume that the sectors that enjoy the largest surpluses (machinery, transport, chemicals, and pharmaceuticals, to name a few) are the main focus, it is not unreasonable to expect a 25% tariff applied to these goods would lift the effective tariff rate on EU exports to the US to around 15%.

The European Union has been clear that in the event of US tariffs it would react “firmly and immediately.”² The EU’s countermeasures to the announcement of steel and aluminum tariffs by the US, scheduled to become effective on 1 April, are a clear indication of the willingness to act.³ Thus, to understand the impact of tariffs, it seems fairly safe to assume that the EU would impose an effective tariff rate on US imports of a similar magnitude.

As for how long any tariffs could last, again this is hard to know as it will depend on a number of factors. However, we would caution that when it comes to EU-US trade, the “off-ramps” are not as obvious as they are for other regions that are being hit with tariffs. For example, with China, Mexico, and to a lesser extent Canada, a transactional approach to negotiations seems more likely. For Europe, the US administration is not only focused on the trade surplus: European governments’ underspending on defense, its Digital Services Tax, fines and regulations on US technology companies, as well as low corporate tax rates in some countries that encourage US companies to book profits in them denying the US of crucial tax revenue, are just some of the many issues that can get in the way of an agreement. Given these challenges, it is arguably fair to assume that if tariffs and counter-tariffs rise, they may remain in place for some time.

Our modeling estimates that such an outcome (effective tariffs of 15% on imports and exports) would have a larger impact on growth than inflation in the Eurozone. It would probably not be enough to send the Eurozone into a recession this year, but it could easily halve the expected growth rate of around 1% for this year. For 2026, the impact would be less as the economy adjusts but would likely still be enough to keep growth below trend, even when the recently announced fiscal expansion (see "Europe’s fiscal moment," 5 March 2025) is taken into account.

As for inflation, our modeling suggests that weaker demand for Eurozone exports, the impact this would have on the labor market, and the hit to consumer confidence more widely, would likely have a disinflationary impact overall. This supports our view that the risks to the outlook for ECB rates remain to the downside; the 2% floor for the deposit rate, which we expect to be reached by June, might not hold.

It should be emphasized that when trying to understand the impact of trade tariffs, there are many grey areas to consider. As has been seen in recent days, there is little predictability about what particular concern will capture President Trump’s attention. But beyond tariff rates, which country, and what products, the impact that such a volatile policy backdrop could have on consumer and business uncertainty is significant. We see the uncertainty channel, by far, as having the largest impact on the economy. Consumer spending falling and firms curtailing investment may happen even if tariffs are eventually avoided.

For investors, this underscores the importance of staying invested to benefit from the medium-term upside we still see in stocks, but it is important to think about hedging equity exposures to manage some of the near-term risks.

¹https://ec.europa.eu/commission/presscorner/detail/en/qanda_25_541

²https://ec.europa.eu/commission/presscorner/detail/en/statement_25_515

³https://ec.europa.eu/commission/presscorner/detail/en/ip_25_740

05 Mar 2025

Thought of the day

What happened?

US stocks fell further in volatile trade on Tuesday, following the imposition of new US tariffs on Mexico, Canada, and China.

The S&P 500 fell as much as 2% intra-day but recovered to close 1.2% lower on the day, erasing all the gains made since November’s US election. The tech-heavy Nasdaq rose 0.4% with NVIDIA recouping part of Monday’s sharp losses to finish 1.7% higher.

Fresh 25% tariffs on Mexico and Canada came into effect after midnight on Monday, while tariffs on China were raised by another 10%, bringing the effective tax rate to around 30%. This action was justified by border and narcotics-related issues. President Trump also said that a separate order for reciprocal tariffs would come into effect on 2 April.

Canada retaliated with a 25% tariff on CAD 30bn of US imports, which will be extended to cover a further CAD 125bn of US imports in 21 days if no resolution is reached. China enacted a 10-15% tariff, effective 10 March, targeting a raft of US agricultural products ranging from beef and pork to dairy, fruit, and grains. It also imposed new restrictions on American companies and filed a lawsuit with the World Trade Organization. Mexico is expected to announce its response on Sunday.

The VIX volatility index climbed further to 23.5 on Tuesday, gold prices rallied 0.8%, and global equities fell, with Europe’s DAX sliding 3.5% as automakers came under pressure. The Mexican peso weakened while the Canadian dollar rebounded, with traders seemingly skeptical that the new tariffs will be long-lasting. The yield on the 10-year US Treasury rose 7 basis points to 4.24%, while agricultural commodities—including cotton, corn, soybeans, and wheat—fell as China’s retaliatory measures targeted US farmers.

After the US market closed, Commerce Secretary Howard Lutnick suggested there was scope for the Trump administration to meet Canada and Mexico "in the middle" on tariffs, with the potential for further announcements on Wednesday. S&P 500 futures pointed to a rebound on Wednesday, with a 0.6% rise at the time of writing.

What do we think?

Our base case assigns a 50% probability to aggressive selective tariffs but no universal tariffs by year-end. Efforts to protect US technology and limit transshipment may include rules of origin legislation to prevent tariff circumvention on Chinese goods. We also expect the use of section 301 to levy select tariffs on a wide range of EU imports with reciprocal retaliation targeting subsidies and trade imbalances, while tariffs on Canada and Mexico are likely to be rolled back at least in part. Markets will be watching for any shifts toward broader enforcement, as a full-scale tariff escalation would raise inflation risks and weigh on equities.

Concerns about AI have impacted tech and AI supply chains. Reports suggest NVIDIA may reduce orders from TSMC and could face probes for potential US tech export control breaches. This adds to uncertainty from DeepSeek's entry, NVIDIA's margin pressures, and Big 4 data center demand doubts. Despite these issues, the broader AI industry remains on a solid footing, in our view, with demand for AI compute continuing to accelerate. Big 4 capex remains strong, with AI spending projected to reach USD 500bn by 2026. Big tech companies also recently flagged capacity constraints as the main impediment to cloud revenue growth, not insufficient demand. Taking a sector level view, our preferred AI names have an average 2025 free cash flow margin estimate of 29%, nearly triple that of the MSCI All Country World Index. Tech’s 2025 earnings outlook also looks robust, with Big 6 and global tech earnings growth estimates at 26% and 19%, respectively.

Tariffs complicate the Federal Reserve’s path to monetary easing. Fed funds futures markets are now pricing in three 25-basis-point rate cuts for 2025, up from two before the tariffs were enacted, as markets assess the economic impact of rising trade barriers. The Atlanta Fed’s GDPNow estimate for 1Q growth has fallen sharply to -2.8% from +2.3% previously, with net exports subtracting 3.6 percentage points from GDP. However, we view the drop in the GDPNow estimate as more noise than signal. The spike in imports appears to be driven by physical gold inflows, which should not materially impact GDP. Consensus estimates for 1Q growth remain around 1.5%, slightly below previous estimates. The bigger concern is the downside risk to economic momentum posed by this new set of tariffs. While the Fed may look through the inflationary impact of tariffs as a one-time price shock, it could still be difficult to resume rate cuts unless the labor market data start showing weakness.

How do we invest?

Navigate political risks. With Canada, Mexico, and China now retaliating, trade tensions have escalated, increasing inflation risks and market volatility. Tariff-related uncertainty and trade policy shifts reinforce the need for portfolio diversification and risk management. In equities, capital preservation strategies can help manage downside risks, while mean-reversion strategies could be an effective way to harness increased volatility. We continue to favor high grade and investment grade bonds, which can provide insulation against trade risks. Additionally, long USDCNY positions could hedge trade-related risks, while CAD and MXN exposure should be hedged or avoided in the near term. Gold remains an effective hedge against geopolitical and inflation risks, in our view, and certain hedge fund strategies may offer resilience in volatile markets.

More to go in stocks. While AI concerns have weighed on tech stocks, strong demand for AI compute and continued investment in infrastructure should support long-term growth. AI-driven capex trends reinforce our confidence in AI as a structural growth driver despite near-term volatility. Without taking any single-name views, while market sentiment remains sensitive to AI demand trends and tariff risks, we believe that earnings growth, AI investments, and economic stability should continue to support stocks.

So, while volatility may persist, we continue to see room for gains in equities, supported by resilient earnings, AI-driven tailwinds, and monetary policy easing. Inflation continues to moderate, Fed policy remains accommodative, and corporate earnings have been solid, reinforcing our view that the S&P 500 can reach 6,600 by year-end.

Caught our attention

Germany's chancellor-in-waiting announces plans for a major boost in defense and infrastructure spending. Friedrich Merz, whose Christian Democratic Union (CDU) alliance won Germany's recent election, has said his nation would do “whatever it takes” to fend off “threats to freedom and peace” in Europe, echoing then ECB President Mario Draghi's promise in 2012 to defend the Eurozone during the debt crisis. Merz, who is in talks to form a coalition with the Social Democrats (SPD), plans to recall parliament to seek approval to free up funds of EUR 500bn for infrastructure spending and exempt defense spending over 1% of GDP from the “debt brake,” a rule introduced in 2009 to cap the government's structural budget deficit at 0.35% of GDP. In addition, the proposal would extend the deficit allowance of 0.35% of GDP to German states (Länder), which currently must run a balanced budget, potentially doubling the government’s borrowing cap to 0.7% of GDP per year.

The plan led to the swiftest one-day sell-off in German government debt since 2020, with the yield on the 10-year German Bund rising around 20 basis points. The news follows comments from Merz, following his party's win in the election on 23 February, that Europe need to ensure “independence” from the US after signals that the Trump administration seems “largely indifferent” to Europe's fate. This week, he said that “additional spending on defense can only be coped with if our economy returns to stable growth within a very short period of time... This requires rapid and sustainable investments in our infrastructure.” The German announcement also comes as the European Commission announced plans for an EUR 800bn defense package. At the time of writing, Germany's DAX equity index is up 3.5% on Wednesday, reversing Tuesday's decline and taking its year-to-date gain to 16%, making it one of the best performing markets in the world in 2025. The euro is up 0.9% against the US dollar to 1.07. And the yield on the 10-year German Bund is up to 2.65% from 2.44% at the start of the week.

Our view: The statement from Merz is clearly a positive development for the German and Eurozone economies. If this package passes, government spending could increase by around a cumulative 20% of GDP over the coming decade. It would also be the biggest fiscal shift in 80 years, surpassing even spending related to the reunification of Germany in the 1990s. Although spending could only start to filter through into the German economy in 2026 given inevitable lags, the boost to both business and consumer confidence could come sooner. Assuming German lawmakers approve the proposed bill, extra spending from Europe’s largest economy could improve the outlook for Eurozone assets and the euro. We keep a Neutral view on Eurozone equities overall given the region’s relatively modest earnings growth outlook, lower AI exposure, and ongoing tariff risks. But a pro-growth shift following the German election results or a peace deal between Russia and Ukraine that lowers gas prices could boost sentiment. We recommend that investors position for potential positive catalysts in Europe via structured strategies on the German DAX index, or through individual stocks that are well positioned to benefit from these themes (see “Six ways to invest in Europe” for more).

China National People's Congress (NPC) offers first look at stimulus playbook. China’s top policymakers in Beijing on Wednesday revealed an official economic growth target largely unchanged at “around 5%,” despite growth challenges and escalating Trump administration tariffs. The annual “Two Sessions” meeting did offer a bigger budget deficit target of 4% of GDP, a full percentage point higher than last year, alongside CNY 1.8tr of special central government bond issuance and a plan for a special local government bond quota of CNY 4.4tr, confirming a more expansionary fiscal policy. The total size of the fiscal package announced is around CNY 3tr in new government debt (or ~2% of GDP), falling within the mid-range of market expectations and affirming a reactive approach to cope with internal and external headwinds. In delivering the opening “work report,” Premier Li Qiang also detailed stronger legal protections and policy support for private enterprises. The broader NPC meeting, which will last about a week, will see the government outline its policy roadmap for the year. The Hang Seng index rose 2.8% on Wednesday, while its China enterprises subindex gained 3.1%.

Our view: The official GDP target appears aimed at anchoring market expectations. We currently expect GDP growth to slow to the mid-4% range this year, down modestly from the 5% pace in 2024. With US tariff outcomes still unclear, we think Beijing may incrementally ramp up policy support if harsher tariffs materialize and impact economic data. The commentary on private markets offers further confirmation that the private sector tech regulatory cycle has ended. The work report also pledges support for the consumption, high-tech, and advanced manufacturing sectors, and pledges to further open up the economy. Li's comments on monetary policy confirm a moderately loose outlook, with more rate cuts as appropriate. We expect banks’ reserve requirement ratio to be cut by 50-100 basis points (bps), while the policy rate could be cut by 20-40bps. The People's Bank of China has also signaled its determination to keep the yuan relatively stable into a period of heightened tariff risk. With policy stimulus largely in line with expectations and tariff risks still looming, we continue to recommend a selective approach within China equities. Our focus remains on tech, which should benefit from both strong fundamentals and Li’s reinforcement of strong legal protection for private enterprises.

04 Mar 2025

Last week’s rupture in the relationship between the US and Ukraine reinforced worries over the magnitude and duration of US support for the war-torn country. These concerns were then validated yesterday after the US suspended military aid to Ukraine. Members of the US administration had already excluded NATO membership and significant US security guarantees for Ukraine in recent weeks. As laid out in “Markets position for possible ceasefire in Ukraine” (13 February), we expect a ceasefire to be reached this year—but only after a drawn-out negotiation process given the lack of trust and distance between desired outcomes.

The latest developments increase the likelihood that Ukraine has to accept a ceasefire from a position of weakness and forced to accept terms more aligned with Russian interests. Russia, meanwhile, likely feels little pressure to come to a quick ceasefire agreement amid continued incremental territorial gains on the battlefield and fraying unity of Ukraine’s allies. US-Russian relations have improved under the Trump administration, and Russia will likely look for sanctions removal and renewed business dealings with the US and Europe (including a resumption of gas sales) as part of a ceasefire agreement. Russia may also reinforce efforts to shape facts on the ground in Ukraine and escalate the war, further weighing on the Ukrainian negotiation position and furthering the US administration’s perception that a ceasefire from a Ukrainian position of strength is not achievable.

Ukraine’s European allies sought to salvage the situation at an already scheduled summit in London. UK Prime Minister Sir Keir Starmer highlighted that Europe needs to lead in terms of security guarantees for Ukraine by assembling "a coalition of the willing." However, for the agreement to have credibility, it would likely need a US backstop. French President Macron floated an initial one-month ceasefire “in the air, at sea, and on energy infrastructure,” but a ceasefire without security guarantees was rejected by President Zelenskyy. Moreover, according to subsequent media releases, Macron’s statements do not fully reflect the UK’s preferred position. The chance of success of a European plan also depends on Russia's willingness to agree to it, a very unlikely scenario without Russian involvement so far, in our view.

As a consequence of US drift from engagement with European defense, spending by European countries has picked up in recent years and is likely to rise further. In Germany, the coalition talks for the new government, for example, include discussions over a EUR 400bn special fund for defense, according to media reports. Similarly, the EU is looking at ways to allow for increased defense spending as well. However, even with significant additional spending, Europe’s militaries and defense industry are unlikely to be able to fully cover for a prolonged lapse of US support for Ukraine, provide a robust force deployment as a potential part of a ceasefire, and improve its own defense readiness all at the same time after decades of underinvestment.

European markets initially reacted negatively to the meeting in the Oval Office: the euro sold off by 0.4% against the US dollar; the Polish zloty, one of the key beneficiaries in the FX space from any ceasefire, sold off by more than 1% against the euro initially; and futures on European equity indices dipped. However, these losses reversed on Monday—European markets even rose to start the week, buoyed by jumps in the shares of defense companies on the back of the likely increase in European spending. Markets may be focusing on the potential benefits of a ceasefire, including an improvement in sentiment and better energy availability in Europe. A deal along Russian terms could hold for quite some time. But one that leaves Ukraine vulnerable and Europe’s security in a state of disarray may limit the benefits from reconstruction and could create a backdrop for renewed shocks due to further conflict down the road. For more detailed investment implications, see our recent publications “What could an end to the war in Ukraine mean for Europe?” (18 February) and “Six ways to invest in Europe” (25 February). It is important to note though that not only the dynamics around Ukraine matter for the European outlook, but also US trade policies. After the US went ahead with tariffs against its key trading partners Canada and Mexico, Europe looks likely to be hit by tariffs as well.

Finally, we highlight again that the path to a ceasefire is by no means certain. Negotiations may stall as the war continues, perpetuating a de facto status quo and failing to live up to market expectations. If, however, talks were to break down completely, an escalation could lead to markets reacting negatively, especially if there was greater perceived chance of direct military involvement by Western forces. Acts of sabotage or attacks on energy infrastructure in Russia or Ukraine, but also in third-party territories, could lead to commodity price spikes. No further funding and weapon support for Ukraine by the US may still see Ukraine continuing the fight with the remaining support from its other allies, though European support could come under pressure amid further Russian territorial gains and rising domestic opposition. This could also lead to a spike in risk premia for the region.

04 Mar 2025

Thought of the day

What happened?

US stocks fell and bonds rose on Monday as tech weakness, escalating trade risks, and renewed economic growth concerns prompted a broad risk-off move. The S&P 500 slid 1.8%, while the tech-heavy Nasdaq dropped 2.6%, weighed down by an 8.8% decline in AI chipmaker NVIDIA. NVIDIA's decline accounted for 30% of the fall in the S&P 500 index.

Bonds rallied as investors sought safety, with the 10-year US Treasury yield falling 5 basis points overnight to around 4.16% right now. On Tuesday, Japan's Nikkei 225 led declines with a 1.2% fall, while the Hang Seng index was down 0.3%. At the time of writing European stock indexes were trading 1-1.5% lower (DAX -1.9%) and S&P 500 futures pointed to a 0.1% decline at the open.

Several factors contributed to the decline in stocks.

NVIDIA, already under pressure in recent days after its quarterly results disappointed high investor expectations, declined on concerns that additional export restrictions may be placed on its chips. Sentiment was also hurt by additional information released by DeepSeek over the weekend that appeared to refute the argument that its model incurs losses when offering inferencing services at their standard rates.

US President Donald Trump on Monday confirmed he will go ahead with a new 25% tariff on Mexico and Canada, and will double tariffs on China to 20% over border and narcotics-related issues. Under the executive order, those tariffs went live at 12:01 EST AM. Trump also said that a separate order for reciprocal tariffs would come into effect on 2 April.

Canada has retaliated with a 25% tariff on CAD 30bn of US imports, which will extend coverage to a further CAD 125bn of US imports in 21 days if no resolution is met. China enacted a 10-15% tariff effective 10 March, targeting a raft of US agricultural products ranging from beef and pork to dairy, fruit, and grains. Mexico is expected to announce its response within the next 12 hours.

The impact of tariff threats on business sentiment was evident in the ISM Manufacturing PMI, which dipped to 50.5 in February, barely in expansion territory. The prices paid index rose considerably to its highest level since mid-2022, signaling increased cost pressures on businesses.

Brent oil crude prices fell 1.8% on Monday and declined a further 1.3% today, after the eight OPEC+ member states with additional voluntary production cuts in place announced that they plan to start unwinding their production cuts gradually from April. The energy sector was among the hardest hit in the S&P 500 on Monday, falling 3.5%. The OPEC+ statement reiterated the cautious stance of the group, indicating it can pause or even reverse Monday’s decision if market conditions require it. In our view, the oil market remains undersupplied, and there is no indication of a fight for market share, but rather a prudent unwind of the production cuts.

What do we think?

The AI investment cycle remains strong. Despite NVIDIA's post-earnings decline, the broader AI industry remains on solid footing, with demand for AI compute continuing to accelerate. NVIDIA's strong guidance reinforces the long-term AI investment cycle, supported by rising Big Tech capex, which is set to grow 35% in 2025 to USD 302 billion. AI spending is on track to reach USD 500bn by 2026, and the industry has projected a 36% CAGR for AI compute through 2029. AI adoption remains strong, with Big Tech citing that its issues lie in capacity constraints and not weak demand. This reinforces the improving monetization outlook, in our view.

That said, the AI diffusion regulation announced by the US Department of Commerce on 13 January, if implemented as planned, will likely impose strict export controls, further complicating the geopolitical and economic landscape for AI advancement. The regulation would limit access to advanced AI hardware for tier-2 and tier-3 countries, curbing innovation and hindering the global expansion of US chip exports. These developments could potentially weigh on global growth.

Since the launch of DeepSeek’s first model, there has also been a legitimate question about the terminal value of frontier models. AI algorithmic innovation is accelerating, leading to lower-cost inference. We expect these lower inference costs to lead to higher AI adoption and scaling laws to remain intact, leading to continued capex growth among hyperscalers that ultimately benefits hardware providers. At the same time, frontier models face more uncertain economics. We therefore recommend keeping diversified exposure to the AI value chain, focusing on vertically integrated companies along the value chain with strong exposure to the enabling and application layers.

Trump’s policies pose risks to growth but thus far the direct economic impact remains limited. While the tariff rhetoric has unsettled markets, we see it as part of President Trump’s negotiation strategy rather than a fundamental shift in trade policy. He has historically used aggressive language as leverage, often walking back threats after securing concessions. On Monday, for example, TSMC, the world's largest contract chipmaker, announced plans to make an additional USD 100bn investment in the US and build five additional chip factories. Though near-term uncertainty remains high, we do not expect tariffs on key trading partners to be broad, sustained, or disruptive enough to derail US economic momentum.

Economic growth concerns persist, but consumer fundamentals remain intact. The latest ISM manufacturing PMI weakened as tariff uncertainty weighed on business activity, while rising input costs kept inflation risks in focus. Still, January’s price consumption expenditures (PCE) price index data confirmed a gradual move toward the Fed’s 2% target, and the labor data remain solid with rising wages and low unemployment, despite a modest rise in jobless claims last week. While trade tensions add uncertainty, the overall economic outlook remains stable, with Friday’s payrolls report set to provide further clarity on labor market conditions.

How do we invest?

Navigate political risks. Tariff-related uncertainty and trade policy shifts reinforce the need for portfolio diversification and risk management. In equities, capital preservation strategies can help manage the risks of equity losses, while mean-reversion strategies could be an effective way to harness increased volatility. We continue to favor high-quality fixed income such as investment grade corporate bonds, which provide insulation against trade risks. Additionally, long USDCNY positions could hedge trade-related risks, while CAD and MXN exposure should be hedged or avoided in the near term. Gold remains an effective hedge against geopolitical and inflation risks, and certain hedge fund strategies may offer resilience in volatile markets.

More to go in stocks. Despite tech sector weakness and trade-related concerns, we continue to expect resilience in US equities, supported by solid earnings and AI tailwinds. NVIDIA's post-earnings pullback weighed on sentiment, but its strong guidance and AI-driven capex trends reinforce our confidence in AI as a structural growth driver, even amid short-term volatility. Without taking any single name views, while market sentiment remains sensitive to AI demand trends and tariff risks, we believe that earnings growth, AI investments, and economic stability should continue to support stocks.

So, while volatility may persist, we continue to see room for gains in equities, supported by resilient earnings, AI-driven tailwinds, and monetary policy easing. Despite trade uncertainty and economic concerns, inflation continues to moderate, Fed policy remains accommodative, and corporate earnings have been solid, reinforcing our view that the S&P 500 can reach 6,600 by year-end.

Caught our attention

Trump's Russia thaw continues. US President Donald Trump late Monday deepened his break with US ally Ukraine, ordering an immediate halt of US military assistance including the delivery of weapon stockpiles. The freeze follows last Friday's public dispute between Trump and Ukraine President Volodymyr Zelenskyy, which Trump again raised in social media criticism on Monday. Separately, Reuters reported the White House has asked the state and treasury departments for a list of sanctions on Russia that could be eased. US Secretary of State Marco Rubio in a statement reportedly suggested White House actions would help “get the Russians to a negotiating table.” This comes amid a renewed European effort, led by the UK and France, to broker a ceasefire and prepare a sustainable peace plan. The Financial Times reports France, Germany, and the UK may agree to seize more than EUR 200bn of frozen Russian assets if Russia were to violate a potential ceasefire deal in Ukraine.

Our view: We have long argued a quick Russia-Ukraine agreement would be unlikely due to mistrust and differing objectives between the two countries. The White House's lack of support may complicate Ukraine's efforts to control current territory and weigh on its negotiating stance into peace talks. Regardless of how effective this new Trump strategy proves, we think European defense spending is set to rise significantly, and EU security policy will take on greater urgency. While we think a Neutral stance on Eurozone equities is still warranted, we recently upgraded our index target in part on the outlook for greater defense spending. We believe the European defense market will prove to be one of the most attractive end markets, characterized by high visibility and reduced cyclicality due to structural growth drivers. If a lasting peace deal is eventually reached, we think Eurozone building materials and industrial companies would likely be among the beneficiaries of reconstruction efforts.

03 Mar 2025

Thought of the day

Ukrainian President Volodymyr Zelenskyy’s visit to the White House on Friday capped a volatile week for markets as investors contended with fast-moving geopolitical developments, tech jitters, mixed economic data, and renewed tariff threats. The S&P 500 ended the week 1% lower, and volatility looks set to continue this week.

British Prime Minister Sir Keir Starmer said over the weekend that European leaders had agreed to draw up a Ukraine peace plan to discuss with the US, while European Commission President Ursula von der Leyen called for a step-up in defense investment. Meanwhile, US President Donald Trump signed a new executive order launching an investigation into the national security harm posed by lumber imports, after vowing to press ahead with the 25% tariffs on Mexican and Canadian goods from tomorrow.

The volume, breadth, and speed of President Trump’s executive actions have caused elevated levels of uncertainty since his inaugura tion six weeks ago as markets consider a wide range of potential outcomes. Hasty policymaking across a broad range of areas could also lead to indirect risks to growth.

But we note that the US economy is entering this period of heightened uncertainty in robust health, notwithstanding the tariff-induced volatility in the trade deficit. Underlying growth in themes like artificial intelligence and electrification should also remain unaffected by the scope of the policy measures announced so far. We think investors should consider the broader context as they navigate headlines on US trade, foreign, and domestic policies.

Trump is likely seeking trade deals to avoid putting US economic activity at risk. US Commerce Secretary Howard Lutnick said the tariffs on Canadian and Mexican goods will go into effect tomorrow, but the exact level of the levies “is a fluid situation.” We do not expect tariffs on Canada and Mexico to be large, broad, or sustained as this would have a strong direct impact on US growth and inflation that the Trump administration would want to avoid. While an average effective tariff rate of 30% on Chinese imports is within our base case, and we would expect more countries to be threatened with tariffs after Trump’s team evaluates reciprocal tariffs, we also expect various deals to be struck to limit their overall breadth and scale. We believe Trump will be willing to seek deals in the first 100 days of his administration to demonstrate his negotiating power.

A ceasefire in Ukraine remains likely this year amid greater European defense spending. The US-Ukraine minerals agreement did not get signed following the clash between Presidents Trump and Zelenskyy, but we think it is too soon to conclude on the role US will play in the potential ceasefire talks between Russia and Ukraine. We have highlighted that an imminent halt to the conflict is unlikely, but believe that a truce can be reached over the course of this year, with rising defense spending from European countries. We expect select defense stocks in the region to benefit from rising security investments, but would recommend preparing for such outcomes through structured strategies, given the still elevated uncertainty on the outlook.

President Trump’s domestic policies pose risks but the direct impact on the economy is limited so far. The US government faces a potential shutdown later this month if a bipartisan deal on funding cannot be reached, while a prolonged impasse over the debt ceiling looms in the summer. But we would expect the economy to bounce back quickly once funding is restored. The longest previous shutdown was 35 days during the first Trump administration, which hit first-quarter 2019 growth by 0.2%. Overall, we note the risks of slower growth and higher inflation due to the second-order effects and hasty execution of Trump’s domestic policies, but the direct impact on growth and inflation from measures announced so far has yet to be significant.

So, to navigate the volatility in the weeks and months ahead, we recommend being invested in stocks, with a focus on the US, AI, and power and resources themes, but also hedging those equity exposures to manage near-term risks. Investors should also ensure portfolios are well diversified with assets including quality bonds, gold, and alternatives.

Caught our attention

US-Ukraine break accelerates Europe's response. A high-profile, on-camera clash between US President Trump and Ukraine President Zelenskyy has put the onus on UK and European leaders to accelerate and strengthen their security and diplomatic response to the Ukraine-Russia war. UK Prime Minister Starmer, who over the weekend played host to European leaders and Canada, said on Sunday that a draft peace plan had been agreed and would be presented to the US. While no details were shared, French President Macron had told Le Figaro newspaper prior to the summit the proposal was built around a one-month truce covering “air, sea, and energy infrastructure attacks” but not ground fighting. The proposal apparently calls for European peacekeepers to eventually be deployed in a second phase, under the assumption the initial truce produces a workable peace framework. NATO Secretary General Rutte on the weekend urged Zelenskyy to repair his relationship with Trump following the on-camera clash, and also revealed several EU leaders at the summit detailed private plans to ramp up their respective defense spending.

Our view: It is too soon to see what this public Ukraine-US dispute will mean for US engagement and ceasefire prospects. We have argued a quick agreement would be unlikely due to mistrust and differing objectives between Moscow and Kyiv. A more positive outcome of a lasting ceasefire would likely serve as a supportive catalyst for European equities and the euro. Regardless, we anticipate a step up in European defense spending and a larger EU policy focus on security, with markets now focused on the potential for new joint European borrowing to fund this defense spending. While we think a neutral stance on Eurozone equities is still warranted, we recently upgraded our index target for several reasons including the outlook for defense spending. We believe the European defense market will be one of the most attractive end-markets, characterized by high visibility and reduced cyclicality due to structural growth drivers. If a lasting peace deal is reached, we think Eurozone building materials and industrial companies would likely be among the beneficiaries of reconstruction efforts.

Tariff wiggle room for Canada/Mexico? US President Trump will press ahead with new tariffs on Canadian and Mexican goods tomorrow, according to US Commerce Secretary Howard Lutnick, but the exact percentage level to be imposed is “a fluid situation” and may not be 25%. Speaking on Fox TV on Sunday, Lutnick suggested Trump's decision could swing based on continued talks between the three trade partners. By contrast, Lutnick indicated the additional 10% levy threatened for Chinese imports is “set,” unless Beijing can “end the subsidies and end making these ingredients from fentanyl.” Separately, US Treasury Secretary Scott Bessent on Friday suggested Mexico was considering matching US tariffs on Chinese goods, in a “very interesting” move that he thought Canada should also match. Trump, meanwhile, on the weekend signed a new executive order launching an investigation into US lumber imports, targeting a key Canadian export to its southern neighbor.

Our view: Conflicting messages from Trump and his officials have added to investor uncertainty ahead of the 4 March tariff date. On one hand, the US economy is still in good shape, which may give the White House more leeway in adopting more aggressive tariffs. But highly aggressive US tariffs would also likely add to inflationary pressure and market volatility. Our base case remains that the administration will seek to stop short of measures that risk rekindling inflation or undermining markets. Tariff uncertainty does bolster the case for quality fixed income as part of a more resilient portfolio mix, in our view. We recommend diversifying and boosting portfolio income through diversified fixed income strategies, senior loans, private credit, and equity income strategies.

US personal spending declines while goods trade deficit hits record high. The Federal Reserve's preferred inflation gauge, core PCE, fell to 2.6% in January, the smallest increase since early 2021 and down from December's revised figure of 2.9%. Personal spending pulled back following December’s strong gains, while personal income rose, supported by labor market strength and cost-of-living adjustments to Social Security payments. More notably, the US goods trade deficit widened to a record USD 153 billion as imports surged 12%, with physical gold inflating the data. The Atlanta Fed’s GDPNow estimate for first quarter growth fell to -1.5% annualized, down from a positive 2.3% growth rate the prior reading on 19 February. This was largely due to net exports dragging on GDP, though consensus forecasts from economists remain around +1.5%.

Our view: While inflation remains above the Fed's 2% target, January's data signaled some progress. Moreover, the GDPNow drop may appear concerning, but we see it as noise rather than a sign of an economic contraction. This week’s key data releases include the February jobs report, ISM PMIs, and the Fed’s Beige Book, which will provide insight into business sentiment under the new administration. Against this backdrop, we expect two US rate cuts in 2025, and we continue to favor US equities and high-quality fixed income, including investment grade corporate bonds and 5-year Treasuries.

14 Feb 2025

Equities and bonds both rallied on Thursday after US President Trump directed his administration to evaluate reciprocal tariffs, but he stopped short of imposing immediate measures.

The directive instructs the US Trade Representative and Commerce Department to develop country-specific import taxes, factoring in non-tariff barriers such as value-added taxes (VATs), subsidies, currency policies, and digital services taxes. However, the process could take weeks or months, with no set timeline for implementation.

Trump cited European VAT policies as an example of unfair trade practices, while a White House official pointed to Japan and South Korea as potential targets. Developing economies with higher tariffs on US products are also likely to be affected. Unlike his 2024 campaign proposal for a universal import tax, this approach appears more tailored but leaves room for broader action.

For now, the delay in implementation limits the immediate market impact, but the risk of retaliation remains. If negotiations stall, the EU, Japan, and South Korea could respond with countermeasures, adding to trade uncertainty, inflation pressures, and market volatility.

Following the news, the S&P 500 rose 1% and 10-year Treasury yields fell 9 basis points on Thursday, as markets rebounded from Wednesday’s sell-off driven by the consumer price index (CPI) release, reassured by the lack of immediate action. Markets also appeared to have a dovish read on Thursday’s producer price index (PPI) report, as core PPI, which excludes food and energy, rose 0.3%, in line with consensus estimates, with price gains concentrated in energy and food rather than reflecting broad-based inflationary pressures. On Friday, Chinese equities extended their recent rally, though regional indices saw mixed performance with Japanese equities slipping on a stronger yen.

What do we think

Markets found relief following the announcement. Wednesday’s CPI data led to a sell-off as investors scaled back expectations of rate cuts, but markets rallied on Thursday as they processed that Trump’s directive does not impose tariffs immediately. The delay suggests this could be a negotiation tactic rather than a firm commitment, similar to how Trump previously used tariff threats to extract trade concessions from Mexico, Canada, and Colombia. That said, the prospect of higher duties on autos, semiconductors, and pharmaceuticals still adds to trade uncertainty.

While these were just threats, threats lead to negotiation. The EU preemptively offered to cut tariffs on US cars, hoping to avoid escalation and protect its struggling auto industry. Bernd Lange, head of the European Parliament’s trade committee, said the bloc could lower its 10% tariff closer to the US’s 2.5% rate as part of a broader deal that includes increased LNG and military equipment purchases. European automakers support the move, while EU officials believe that existing tariffs on Chinese EVs will prevent a flood of imports. If talks fail, Brussels is prepared to retaliate against US tech and financial firms using new trade enforcement tools designed after Trump’s first term. Following an in-person meeting with India’s prime minister, Trump said the two countries would seek to reduce “very high” Indian tariffs on US goods and strike deals for the purchase of US oil, gas, and combat aircraft.

Our base case is a scenario of “selective tariffs.” We do not expect sustained blanket universal tariffs but rather targeted measures and negotiation-driven outcomes. Highly aggressive US tariffs would almost certainly trigger retaliation by US trading partners, and there are risks of a tit-for-tat ratcheting up of measures. Markets will be watching closely for any shifts toward full enforcement, as a broad implementation of tariffs would raise inflation risks and likely weigh on equities, and have the potential to dent, but not derail, US economic growth.

How do we invest

Navigate political risks. The latest tariff directive from the Trump administration introduces heightened uncertainty in global trade, reinforcing the need for portfolio diversification and hedging approaches, in our view. In equities, capital preservation strategies can help manage downside risks. As volatility and skew are low relative to current levels of uncertainty, mean reversion strategies can also be an effective way to harness higher volatility. We like high grade and investment grade bonds, as they offer some insulation against uncertainty and can help diversify portfolios. Separately, we believe long USDCNY could be an effective hedge against trade risks, while CAD and MXN long exposure should be hedged or avoided in the near term. Gold also remains an effective hedge against geopolitical and inflation risks, in our view. For investors willing and able to manage risks inherent in alternatives, we also think certain hedge fund strategies are well positioned to offer attractive risk-adjusted returns and portfolio resilience during market volatility.

More to go in equities. Despite the administration’s push for reciprocal tariffs, we expect market resilience, particularly in US equities, as economic growth remains intact. We will continue to monitor trade policy closely. Tariffs on Canada and Mexico are unlikely to be sustained, US economic growth should represent a tailwind for stocks, and we continue to believe that AI presents a powerful structural tailwind for earnings and equity markets. Our base case remains for the S&P 500 to rise to 6,600 by year-end.

Harvest currency volatility. The reciprocal tariff framework and continued uncertainty around trade negotiations are likely to fuel currency volatility, providing an opportunity to use volatility spikes to boost portfolio income. Over the next one to three months, and while trade uncertainty remains particularly elevated, we like picking up yield by selling the upside in the EURUSD and downside in the USDCHF. Over the next six months, we like selling the upside in the CHFJPY, the EURGBP, and the EURAUD, and the downside in the GBPUSD, the GBPCHF, and the AUDUSD. While the US dollar has room to strengthen in the near term, we expect it to give up its gains over the balance of 2025.

14 Feb 2025

US Vice President JD Vance threatened both economic and military “tools of leverage” against Russia if a peace deal is not reached that ensures Ukrainian independence. Vance told a Wall Street Journal reporter that everything was on the table, and President Trump was “not going into this with blinders on.” Vance is expected to meet Ukrainian President Volodymyr Zelenskiy later today at the Munich Security Conference. President Trump earlier this week held calls with both Zelenskiy and Russian President Vladimir Putin in a bid to begin negotiations to end the war. In recent days, global markets have positioned for progress toward a negotiated end of the Russia-Ukraine war, which began almost three years ago, with the euro and eastern European currencies strengthening, European equities rising, and oil prices easing.

Our view

Our base case is for a ceasefire to be reached during the year, though negotiations may be protracted given the lack of trust and distance between desired outcomes. Ending the fighting would likely involve Ukraine losing some territory—with the goal of reclaiming it later via diplomatic means—but gaining security guarantees and reconstruction commitments. Russia may negotiate sanctions relief and partial gas flow resumption to Europe. However, gas flows are unlikely to return to pre-war levels, in our view. Upside scenarios include rapid progress toward a ceasefire—an outcome that we believe the market is currently partially pricing in. But the path to a ceasefire is by no means certain. Moreover, while we think that while the Kremlin’s calculus ultimately favors a deal, it appears in no hurry to accept one.

For investors, we continue to recommend regional diversification and a mix of stocks, bonds, real estate, and alternative investments to protect against geopolitically induced market turbulence while also being exposed to positive risk scenarios. In the current situation, we caution against taking an overly narrow view on individual assets purely from the perspective of a perceived increase in likelihood of a ceasefire in Ukraine. Global growth and inflation dynamics, central banks’ policy decisions, and the Trump administration’s trade policies remain the more relevant drivers of portfolio returns, in our view. Accordingly, we favor putting cash to work in stocks and high grade and investment grade bonds and considering investment in the AI opportunity and power and resources. We see hedges for political risks—not only around the war in Ukraine—in gold, oil, and via using structured investments. To read more, please see the latest Global Risk Radar.

11 Feb 2025

US President Donald Trump on Monday raised import tariffs on steel and aluminum to 25% “without exceptions or exemptions.” This marks a substantial step up from the 10% level he imposed in 2018. The administration looks set to end carve-outs, quota deals, and exemptions for partner nations that expanded under both him and his successor, Joe Biden. The new tariffs, which the White House says will take effect on 4 March, will expand to cover a wide range of downstream metal products.

When asked about potential retaliation from the US's trade partners, Reuters reports Trump said “I don't mind.” Canada’s industry minister said he is consulting with “international partners,” and the response will be “clear and calibrated.”

Other tariffs may also be coming, with Trump reiterating plans in the coming days for “reciprocal tariffs” on all countries that impose duties on US goods. This round follows the on-then-off plan earlier this month to levy a 25% tariff on most Canadian imports—except for energy, which had a lower 10% rate—and all Mexican imports over disputes around narcotics and immigration control. While Trump ultimately hit pause on those tariffs, he did move forward with a 10% blanket tariff increase on Chinese imports, prompting retaliatory tariffs from Beijing.

Unlike last week's whipsaw response to tariffs, in which risk assets sold off and then recovered, the market reaction thus far has been fairly muted. The CBOE VIX Index of implied US equity volatility remains subdued at 16 points, within range of its 2025 lows. Gold hit a fresh all-time high of USD 2,942 an ounce, before giving up some gains to USD 2,905/oz—still about 12% up since late December.

With investors taking more of a tempered approach, we make several observations:

Trade imbalances cannot easily be negotiated. While the US imports close to 25% of its steel and nearly 70% of aluminum, its reliance varies. Steel production has room to expand if prices justify it, given existing overcapacity and new plants coming online. Aluminum, however, is far more import-dependent, with high costs and regulatory hurdles making domestic expansion unlikely. We are skeptical of this outcome given high US wages and other barriers such as environmental factors, permitting backlogs, long lead times for new facilities, and capital discipline by smelters, which are reluctant to invest in long-term projects unless prices remain elevated for an extended period. Other exporters of metals to the US, such as South Korea and Brazil, also have sizable trade surpluses with the US. Making matters more difficult, the strong US dollar side effect of higher US tariffs may also exacerbate the US trade deficit as it limits foreign buying power for US goods.

It’s also important to distinguish between the different tariff categories under consideration. The steel and aluminum tariffs fall under Section 232, a provision for addressing national security concerns, while the broader reciprocal tariffs would be issued under Section 301 to address unfair trade practices. The steel and aluminum tariffs have been in force since 2018. While Trump initially made clear there would be no exceptions, he later left the door open to a possible exception for Australia, citing its trade surplus with the US and its large purchases of US aircraft. With the executive order not yet published, markets will await more clarity beyond the headlines on both the legal basis and final details on exemptions, quotas, and effective rates.

The metal tariffs may serve as negotiating leverage. The US is heavily dependent on its North American partners for the two metals: Canada is its number one export partner for both aluminum and steel, while Mexico ranks third for steel and is a major provider of scrap aluminum and alloys. Trump's team may be seeking to accelerate a renegotiation of the United States-Mexico-Canada Agreement (USMCA) free trade pact. Ultimately, we believe if these specific tariffs are imposed, the relative growth hit to the US economy will be more manageable than the ones Mexico or Canada would face.

Other partners with higher barriers to US goods are on notice. Under our base-case tariff scenario, we've been arguing that nations with higher average/effective tariffs will face the risk of higher US tariffs. The trade-weighted versus average tariffs can vary significantly, but the distinction may not be important to the White House. Outside of North America, South Korea, Vietnam, India, and Brazil stand out for higher average tariffs. The European Union is lower on the list, but several categories like autos and food have high barriers, and the underlying value of trade at risk is significant.

So, despite the relative calm in markets this week, we believe investors need to remain vigilant to changes in trade and tariff policies. We still expect that a solid US economy, AI tailwinds, and gradual Federal Reserve rate cuts will offer a favorable backdrop for equities. Our base case remains for the S&P 500 to rise to 6,600 by year-end. Volatile markets do require an increased focus on portfolio diversification and hedging approaches. In equities, capital preservation strategies can potentially help limit portfolio losses. Changes to trade policy tend to have a notable impact on currency markets, providing investors an opportunity to use volatility spikes to boost portfolio income. We continue to see gold as an effective portfolio hedge and diversifier, and believe an allocation of around 5% within a USD balanced portfolio is optimal.

10 Feb 2025

Mexico remains among the most exposed countries to changes in US trade policy. Over USD 1.2 million in products move across the border every minute, making it the busiest in the world. As an example, Texas’s trade with Mexico is larger than the United States’ trade with Japan and Spain combined. While a 25% tariff on Mexican imports was postponed after last-minute negotiations, Damocles' sword continues to hang over Mexico’s head.

Mexico has responded with a cooperative approach, deploying additional National Guard troops to curb migration and stepping up fentanyl seizures. These moves align with US priorities, but what further measures might come from the Trump administration remain anyone’s guess.

Mexico is deeply integrated into North American supply chains, primarily exporting intermediate goods. With modern supply chains, a single component in a vehicle can cross the US border between six and eight times before final assembly. This interdependence means that aggressive tariffs wouldn’t just hurt Mexico—they would also raise costs for US manufacturers and consumers, potentially fueling inflation.

Most LatAm exports are commodity based; Mexico stands out

Top export products to the US by country of origin, data as of 2022

The idea that automakers could quickly shift production to the US or another country is unrealistic; building new auto plants in the US would take years and billions of dollars in investment. We therefore believe the tariffs threat will remain a negotiation tool. However, the risk of them becoming a permanent fixture is real, particularly given Trump’s focus on trade deficits—an issue that cannot be easily “negotiated away.”

For now, the Sheinbaum administration appears to recognize the need for constructive engagement and has already taken steps to align with US priorities. Recent actions include increased fentanyl seizures, new tariffs on Chinese imports, and enhanced enforcement measures against illegal immigration.

Mexico's continued measures to reduce Asian imports

Tariffs placed on Asian economies since last year

If Sheinbaum’s administration continues to align with US priorities, this should help stabilize investor sentiment. However, with trade policy volatility likely to persist, Mexico must prepare for an extended period of economic and geopolitical uncertainty.

For more on the Sheinbaum administration’s near-term challenges and the investment implications, download the full report, “Mexico: Coping with Damocles' sword.” 

07 Feb 2025

What do Trump's tariffs mean for bonds and equities? UBS GWM CIO Strategist Christopher Swann explains the fundamentals of tariffs and their impact on markets.

07 Feb 2025

US President Donald Trump on Tuesday signed a national security presidential memorandum that aims to apply "maximum pressure" on Iran to, among other objectives, deny the Islamic Republic of developing a nuclear weapon. The memorandum requests the Secretary of State and the US Treasury Department to implement a campaign aimed at driving Iran’s oil exports to zero. The oil market reaction has been muted, as President Trump also indicated he prefers to work out a deal with Iran rather than signing the memorandum.

Hence, given that reluctance, market participants will likely closely watch how the US Treasury Department intends to enforce existing sanctions and if new sanctions are announced, what they may target. On Thursday, the US Treasury Department issued new sanctions targeting, among others, three tankers out of an estimated 280 dark fleet tankers involved in shipping Iranian barrels. It is unclear how the sanctions will affect Iranian oil exports or the impact on buyers of said oil.

Iran's supreme leader Ali Khamenei said on Friday it would be "unwise and dishonorable" to negotiate with the United States, but did not rule out the possibility of talks. He also added it was the current US president who chose to break the previous nuclear deal. So it remains unclear whether the two parties are willing to negotiate a new deal.

Oil market participants will likely keep a close eye on whether the US Treasury Department makes further announcements over the coming weeks. While January crude exports from Iran look to have been lower than in previous months, it remains unclear how buyers of Iranian barrels will react to the new US administration. Imports of Iranian barrels in China seem to be falling, while Iranian crude stored on tankers (so-called floating storage) is rising. This indicates that while Iranian exports haven't been significantly disrupted, there is some reluctance to buy those barrels. We continue to expect that Iranian crude exports may get somewhat disrupted over the coming months.

We also remain surprised that market participants still react to President Trump's comments when it comes to bringing down oil prices. On Thursday, he said the US will have "more liquid gold coming out of the ground" and that will drive the price of oil down. But there is currently no indication of accelerating US drilling activity. We expect only muted US crude production growth in 2025. The only certainty to us is that comments from President Trump will continue to drive volatility in the oil market.

04 Feb 2025

Equities had a volatile start to the week after the Trump administration pushed forward with plans to impose higher tariffs on Canada, Mexico, and China over the weekend. The S&P 500 closed down 0.8% on Monday.

But this was a smaller decline than futures had initially indicated. Sentiment partially recovered after news that the threatened tariff hikes on Mexico would be delayed by at least a month following concessions on border security and enforcement. Later, Canada announced a similar pause after it revealed its own incremental border control measures and funding pledges.

These delays revived hopes that President Trump's tariff threats may be more negotiable than previously thought. While no such deal has emerged to forestall the 10% incremental tariff on Chinese imports, which are now technically in effect, China's response was viewed as relatively muted—including 10-15% levies on US energy and agricultural tools. The measured nature of China's retaliation appeared intended to avoid further escalation. The Hang Seng Index closed 2.8% higher.

But uncertainty remains high. Here are some answers to frequently asked questions we have been receiving from investors:

1. Why is President Trump targeting these countries?

The US president has long stated his enthusiasm for tariffs. But some of his initial targets have come as a surprise—with an additional 25% tariff for neighbors Canada and Mexico. China, a more long-standing trade rival, has also been included, though at a lower additional rate of 10%. The White House has said this reflects a desire to hold these nations “accountable to their promises of halting illegal immigration and stopping poisonous fentanyl and other drugs from flowing into our country.” It is notable that concessions on border control from Mexico and Canada have been sufficient to delay the implementation of tariffs.

The administration has also cited the bilateral trade deficits the US runs with these nations, which President Trump has said are evidence of unfair practices. President Trump has also threatened to impose tariffs on the European Union, having criticized the trade bloc for the scale of its trade surplus with the US.

2. How significant is trade with China, Mexico, and Canada for the US economy?

The US is a relatively self-sufficient economy, with a relatively low reliance on foreign trade by international standards. Imports account for around 14% of US GDP, as of the latest full year of data from 2023. However, China, Canada, and Mexico account for 43% of those imports.

Even this number may understate the importance of trade flows between the US and its neighbors. For example, a component for a US auto may cross the border with Mexico many times during assembly. If each move across the border were to trigger a 25% tariff for the US automaker, the supply chain would need to be adjusted.

3. Why would energy face a lower tariff rate? Isn’t the US energy independent anyway?

The US is a net exporter of both petroleum and natural gas. However, oil varies in consistency and refineries are configured to process different types of crude. Prior to the US shale revolution—which boosted US production of light oil—many US refineries were set up to process heavy oil, much of which is imported from Canada. As a result, high tariffs on Canadian crude would push up the politically sensitive price of gasoline, especially in the Midwest.

4. Are these tariffs just a threat or the start of a new normal?

This should become clear over the coming weeks and months. Last-minute reprieves for Colombia, Mexico, and Canada provide some hope that President Trump is using tariffs as a negotiating tool rather than a permanent fixture of economic policy. The administration also came under pressure from business groups to avoid a confrontation with Canada and Mexico. The National Manufacturers’ Association wrote that its members “understand the need to deal with any sort of crisis that involves illicit drugs crossing our border,” but also feels “protecting manufacturing gains that have come from our strong North American partnership is vital.” In our view, the president is unlikely to want to alienate key constituencies in his voter and funding base.

5. Can we learn anything from factors that led to changes in tariff policies during Trump’s first term?

Various potential lessons can be learned from Trump’s first term. It is notable that the momentum of higher tariffs against Chinese imports was slowed after the nation agreed to step up purchases of US goods.

That said, the start of the second term has been different from the first term, and the mindset of the administration could be different this time. The key will be whether Trump has become convinced that tariffs are worthwhile in and of themselves, and not just a bargaining tool. This might become clearer in the coming weeks.

6. Are there ways to avoid these tariffs for businesses and consumers?

Global trade patterns can be rerouted over time to avert tariffs. After the first-term tariffs against China, China rerouted about a third of its exports to the US. That is not practical for Mexico and Canada, however, for simple reasons of geography. Also, some of China’s rerouting went via Mexico and Canada and could now be subject to tariffs.

The higher the tariff rates, the more incentive there will be to take actions such as moving factories from China to neighboring low-wage countries. Of course, moving production to the US would be one way to avoid tariffs and the best outcome from the president’s viewpoint, but we are skeptical that there will be significant "onshoring." Wages in the US are high, and retaliatory tariffs could make it difficult to export from any newly built factories in the US.

7. What would be the effect on US growth and inflation if the tariffs do remain in place?

The effect of a prolonged retaliatory exchange of tariffs is stagflationary—meaning that prices would experience a one-off increase, while we estimate expected growth would slow 80-100 basis points. As it stands, our base case is a scenario of “selective tariffs,” which have the potential to dent, but not derail, US economic growth.

8. How about the impact on China, Mexico, and Canada?

The prolonged imposition of tariffs may be enough to push the Canadian and Mexican economies into recession while also representing a sizable inflationary shock. The depreciation of their currencies as trade "shock absorbers" could mitigate some tariff-related shock to exports, but also reduces their international purchasing power. Mexico was already grappling with an economic slowdown, with GDP growth of just 1% expected in 2025 prior to the tariff announcement.

9. What does it mean for global trade and global growth? Is the risk of a recession rising?

Aggressive US tariffs would almost certainly trigger retaliation by US trading partners, and there are risks of a tit-for-tat ratcheting up of tariffs. Policy uncertainty is unusually high, which is damaging to global growth since it is difficult for businesses and consumers to make plans. The US and China are unlikely to suffer recessions even if tariffs prove significant, but other countries that are more reliant on bilateral trade with the US, especially Canada and Mexico, could be more vulnerable. Overall, we still think a global recession remains unlikely.

10. How should I invest considering the uncertainty?

Investors should prepare for market volatility and potential policy surprises by considering portfolio diversification and hedging approaches.

Navigate political risks. More volatile markets require an increased focus on portfolio diversification and hedging approaches. In equities, capital preservation strategies can potentially help limit portfolio losses. As volatility and skew are low relative to current levels of uncertainty, mean-reversion strategies can also be an effective way to harness higher volatility. We like high-quality government and investment grade corporate bonds, as they offer appealing yields, some insulation against uncertainty, and can help diversify portfolios.

More to go in equities. Although we will continue to monitor trade policy closely, our base case remains for the S&P 500 to rise to 6,600 by year-end. If implemented, tariffs on Canada and Mexico are unlikely to be sustained, resilient US economic growth should support stocks, and we continue to believe that AI presents a powerful structural tailwind for earnings and equity markets. We believe that the recent development of DeepSeek, a lower-cost AI model, will lead to even broader proliferation of AI, enhancing growth and productivity.

Harvest currency volatility. Changes to trade policy can particularly impact currency markets, providing investors an opportunity to use volatility spikes to boost portfolio income. Over the next one to three months, and while trade uncertainty remains particularly elevated, we like picking up yield by selling the risks of a rally in EURUSD and of a fall in USDCHF. Over the next six months, we like selling the risk of gains in the CHFJPY, the EURGBP, and the EURAUD exchange rates, and selling the risk of declines in the GBPUSD, the GBPCHF, and the AUDUSD crosses.

03 Feb 2025

President Donald Trump has so far been true to his word, with trade taxes (tariffs) about to be imposed on Canada, Mexico (delayed by a month), and China. Governments, businesses, and consumers in Europe will have no doubt heard the president’s threat that tariffs on the EU will “definitely happen,” too. Even the UK, which has a negligible goods trade balance with the US, has been singled out by the president as being “way out of line.”

The threat of tariffs has been looming since the election, and the EU and European governments have been preparing for this possibility. To be sure, Europe enjoys a large surplus in traded goods with the US across a range of industries. President Trump often cites a USD 300bn deficit in his speeches, but in terms of the overall footprint on the economy, notwithstanding the fact that the US is the most important export market for the bloc (Fig. 1), the numbers are a lot less dramatic. For the Eurozone, goods exports to the US are around 3% of GDP, and imports are close to 2%. Thus, the economic impact from the imposition of tariffs would be relatively small.

However, what these estimates don’t show is the impact on sentiment in Europe. If companies decide to slow investment and pause hiring, and consumers respond by saving more and spending less, the impact on the economy is likely to be much bigger than suggested by the trade numbers alone. Another consideration is the impact of US trade taxes on other countries, notably China. If trade is redirected away from the US toward the Eurozone, without offsetting measures from the EU, it could lead to lower prices for imported goods—which would compound the disinflationary trends already under way. Finally, US tariffs could also harm growth globally, including in the US itself, which would weigh on EU exports. A weaker euro against the USD would, in our view, only partially offset these effects.

In our base case, we assume US tariffs on select European goods are likely to come into force in the second half of this year, and this is one of the reasons for our slightly below consensus forecasts of 0.9% GDP growth this year for the region. However, the speed and hard line shown by the president to his closest neighbors raises the threat that a trade dispute with Europe could happen sooner. In our view, this increases the downside risks to Eurozone growth and inflation in the coming quarters.

We currently look for the European Central Bank (ECB) to continue cutting rates by 25 basis points at every meeting in the first half of the year, only pausing when the deposit rate reaches the 2% neutral level. In our view, developments with regard to US trade policy in recent days only increase the risk that the ECB will have to take interest rates even lower to support the economy.

For EMEA-based investors, we recommend they continue to implement strategies that can help portfolios Navigate political risks by considering portfolio diversification and hedging approaches. Volatility in FX markets is an opportunity to enhance portfolio yields by Harvesting currency volatility. Finally, lower rates in the Eurozone with the possibility of more cuts than we foresee emphasize the need to Lock in yields.

02 Feb 2025

What happened?

The Trump administration has imposed a 25% tariff on all imports from Mexico and most imports from Canada, along with an additional 10% duty on all imports from China, effective 4 February. The executive order cites a national emergency due to “the extraordinary threat posed by illegal aliens and drugs” as the justification for these measures.

In response, Mexico's President Claudia Sheinbaum has directed the economy minister to implement a plan that includes both tariff and non-tariff retaliatory measures. Sheinbaum is expected to announce the details of her plan early Monday.

Our view

In our base case, we anticipate that Mexico will adopt a pragmatic and cooperative approach, delivering a measured retaliatory response.

We do not foresee the US's 25% tariff on Mexico remaining in place for an extended period of time, as this would be akin to cutting off one’s nose to spite one’s face.

Given that Mexico and Canada together account for approximately 30% of total US trade, permanent tariffs would pose significant economic risks to the US itself, thereby carrying political repercussions for the Trump administration.

The economic fallout would be substantial, manifesting as higher costs for businesses, inflationary pressures, and potential job losses in industries reliant on North American supply chains. This move is likely to encounter fierce opposition and lobbying efforts from certain industry groups, as well as legal challenges.

Similar to what happened during the recent Colombian tariff saga, the tariffs may pave the way for a deal, potentially including an early renegotiation of the United States-Mexico-Canada Agreement (USMCA), rather than waiting for the review in 2026.

However, the risk that these tariffs could become more permanent is real. US President Donald Trump has linked tariffs to trade deficits, which are not easily “negotiated” away. Unlike other issues such as border control, trade imbalances are more structural, driven by factors that extend far beyond tariff policy, and can take considerable time to adjust.

Impact on the Mexican economy

Mexico was already grappling with an economic slowdown, with GDP growth expected at just 1% in 2025 prior to the tariff announcement. The 25% US tariff could potentially push the country into a recession, depending on its duration.

The USD 800 billion annual trade relationship between Mexico and the US underscores the depth of their economic interdependence. Mexico’s economy is highly open and deeply reliant on the US, making it particularly vulnerable to trade disruptions. For instance, some car components cross the border multiple times before the vehicle is finally assembled, meaning even short-lived tariffs could lead to significant supply chain disruptions.

In the longer term, we remain optimistic about North America’s economic integration and competitiveness. Over the past three decades, interconnected supply chains and cross-border infrastructure have strengthened the region’s industrial base, making economic decoupling unlikely.

Most critically, the US cannot de-risk from both China and Mexico simultaneously without severely disrupting its own economy. Many of the intermediate goods supplied by Mexico are essential for American manufacturing competitiveness.

Yet, we acknowledge that Trump may be steering the US toward a dramatically different direction. Uncertainty regarding international trade could become a constant over the next four years. In such a scenario, economic growth trends, financial market stability, and historical geo-economic alliances would face significant challenges.

Investment implications

The USDMXN exchange rate was trading moderately weaker around 21.25 at the time of writing. Such a level does not fully price in the associated risks, in our view. Investors should consider hedging or avoiding MXN exposure in the near term.

While Mexico’s sovereign US dollar-denominated bonds are already trading at wider spreads compared to similarly-rated sovereigns, spreads may widen further in the near term as investors price in the likelihood of a further decline in Mexico’s credit fundamentals due to the impact of tariffs. This comes at a time when Mexico's credit outlook is already deteriorating, influenced by recent constitutional reforms and concerns about the fiscal consolidation this year. We maintain a neutral stance on Mexico’s sovereign US dollar bonds, but we believe the longer end of the yield curve remains the most vulnerable.

Despite likely higher volatility, we think Mexican corporate issuers under our coverage are likely to remain resilient due to significant operations overseas, world-class management teams with a proven track record in handling challenging environments, liquid balance sheets, and healthy leverage ratios.

02 Feb 2025

What happened?

The Trump administration has signed executive orders to impose an additional 25% tariff on most imports from Canada and Mexico, as well as an additional 10% duty on all imports from China, citing a national emergency over “the extraordinary threat posed by illegal aliens and drugs.” Duties levied on Canadian “energy resources” will face a lower 10% tariff, although Mexican energy imports will face the full 25%. President Donald Trump also reiterated a threat to hike tariffs on the European Union, citing the “tremendous deficit” with the EU. He also said that he would “eventually” put tariffs on semiconductors, steel, copper, aluminum, and pharmaceuticals.

In response, Canada's government has announced a 25% tariff on some US imports, starting with CAD 30bn worth of US goods on 4 February, to be followed by another CAD 125bn added in 21 days’ time. Canada is also said to be considering several additional measures, including restrictions on critical mineral and energy exports. Mexico’s President Claudia Sheinbaum has also ordered retaliatory measures, and China's foreign minister has vowed to take “necessary countermeasures,” though neither provided additional details.

At the time of writing, S&P 500 futures are down 1.7%.

What do we think?

In our Monthly Letter: Prepare for Trump 2.0, we said that “aggressive” tariffs by the US, including 30% effective tariffs on Chinese imports and selective tariffs against EU imports, were within our base case scenario. We also said that such tariffs would be insufficient to derail US economic growth. However, we also said that tariffs against Canada and Mexico, if sustained, have the potential to inflict a “tariff shock” to US growth and risk higher US inflation, as Mexico and Canada together account for about 30% of the US’s total trade.

In our base case, we do not expect the 25% tariffs on Canada and Mexico to be sustained for a prolonged period. The Trump administration would not want to jeopardize US economic growth or risk higher inflation by leaving the tariffs in place for a sustained period, and significant stock market volatility could lead to a change in approach. We would expect industry groups representing companies on the northern and southern borders to file court challenges and lobby for their removal. It is also possible that the tariffs against Canada and Mexico are merely a tactic to accelerate a renegotiation of the United States-Mexico-Canada Agreement (USMCA), which is a free trade pact between the countries. The significant potential economic effect of the tariffs on Mexico and Canada may ultimately lead to concessions, even if their initial response has been to announce retaliation.

At the same time, Trump's comments on Friday, which suggested that the tariffs were “purely economic,” linking them to the US’s bilateral trade deficits, are more concerning, in our view. Deficits cannot easily be "negotiated" in the same way as non-trade issues like migration and drug control. Meanwhile, we continue to believe that the US effective tariff rate in China will eventually rise to 30% (from the current 11%), even if Trump’s recent more diplomatic tone with China suggests the White House may believe it has something to gain from the more gradual approach.

In the weeks ahead, tariffs are likely to represent an overhang on markets and contribute to volatility, at least until investors gain greater clarity on the path and destination of US trade policy.

In the very near term, the period between now and implementation on Tuesday could provide a brief window for negotiation or compromise. Thereafter, we believe US Customs and Border Protection may need some weeks to implement the tariffs (based on the experience of tariffs imposed in 2018 and 2019), providing a potential further window for negotiation. Another key date is 1 April, the deadline for federal agencies to report back their findings on persistent trade deficits and “unfair” trade policies—a report which could be a catalyst for additional tariffs. Earlier last week, the Financial Times reported that US Treasury Secretary Scott Bessent is proposing a gradualist approach on universal tariffs, starting at 2.5%, with a monthly step-up of 2.5 percentage points until they reach as high as 20%, while Trump had singled out tariffs on computer chips, medicine, and metal imports.

How to invest?

Navigate political risks. More volatile markets require an increased focus on portfolio diversification and hedging approaches. In equities, capital preservation strategies can help manage downside risks. As volatility and skew are low relative to current levels of uncertainty, mean reversion strategies can also be an effective way to harness higher volatility. We like high grade and investment grade bonds, as they offer some insulation against uncertainty and can help diversify portfolios. Separately, we believe long USDCNY could be an effective hedge against trade risks, while CAD and MXN long exposure should be hedged or avoided in the near term. Gold also remains an effective hedge against geopolitical and inflation risks, in our view. For investors willing and able to manage risks inherent in alternatives, we also think certain hedge fund strategies are well positioned to offer attractive riskadjusted returns and portfolio resilience during market volatility.

More to go in equities. Although we will continue to monitor trade policy closely, our base case remains for the S&P 500 to rise to 6,600 by year-end. Tariffs on Canada and Mexico are unlikely to be sustained, US economic growth should represent a tailwind for stocks, and we continue to believe that AI presents a powerful structural tailwind for earnings and equity markets. We believe that the recent development of DeepSeek, a lower cost AI model, will ultimately lead to even broader proliferation of AI, enhancing growth and productivity.

Harvest currency volatility. Changes to trade policy are likely to be keenly felt in currency markets, providing investors an opportunity to use volatility spikes to boost portfolio income. Over the next one to three months, and while trade uncertainty remains particularly elevated, we like picking up yield by selling the upside in the EURUSD and downside in the USDCHF. Over the next six months, we like selling the upside in the CHFJPY, the EURGBP, and the EURAUD, and the downside in the GBPUSD, the GBPCHF, and the AUDUSD. While the US dollar has room to strengthen in the near term, we expect it to give up its gains over the balance of 2025.

24 Jan 2025

Trade wars, tariff threats, and trillion-dollar tax cuts—Trump 2.0’s economic agenda is taking shape. But here’s what markets might be missing: 2025’s economic story could be unlike anything we’ve seen before.

20 Jan 2025

What happened?

Donald Trump has been sworn in as the 47th President of the United States. In a wide-ranging inaugural address, President Trump made pledges on issues ranging from free speech to ownership of the Panama Canal. From an economic perspective, the agenda he laid out was in line with campaign promises, with pledges to bring down inflation, boost energy production, and levy tariffs on imports.

Press reports citing an administration official indicated that President Trump would issue a broad memorandum directing federal agencies to investigate persistent trade deficits and address unfair trade and currency policies by other countries. The memo singled out China’s compliance with the 2020 trade deal and the US-Mexico-Canada Agreement (USMCA), which is set for review in 2026, as particular areas for scrutiny.

US equity and bond markets were closed on Monday for the Martin Luther King Jr. Day public holiday. However, S&P 500 futures rose by 0.4% and the US dollar index was down 1.2% at the time of writing, apparently on initial relief that President Trump had not issued executive orders imposing tariffs on his first day in office.

What do we expect?

President Trump’s policy agenda—if enacted in its entirety—would have significant macroeconomic repercussions. However, financial and political constraints are likely to mean that enacted policy risks falling short of campaign pledges in some instances. There is also the consideration that the President may “escalate to deescalate,” with some of his proposals likely to prove to be negotiating tactics.

For example, the President declared a national emergency at the southern border and stated that the process of returning illegal immigrants would begin immediately. However, funding is currently not available for such a program, and reducing the labor supply through deportation could contribute to higher inflation.

President Trump also pledged to increase oil production and fill the Strategic Petroleum Reserve (SPR). But the level of oil production is largely controlled by private companies, and there is currently no clear sign of changes in capital spending or drilling activity because of the election. Filling the SPR, meanwhile, would require additional funding from Congress, and there are physical constraints on how quickly it can be filled.

Where the President enjoys more leeway is in the use of executive authority to impose tariffs on imports. Today’s use of a memorandum proposing scrutiny of current practices rather than the immediate imposition of fresh tariffs has reassured markets in the short term. But we believe it would be premature to assume that eventual new taxes on imports will be limited in size or scope.

In our base case, we expect the effective tariff rate on China to rise to 25-30% (from 10% currently). We also expect measures to protect technological interests, rules limiting transshipment, and tariffs on EU autos and pharmaceuticals. Possible retaliations by China could include reciprocal tariffs, weakening the Chinese yuan, and restricting critical mineral exports.

A risk case would include some combination of the imposition of universal tariffs on all US imports, particularly high tariffs on China (e.g., 60%), and/or meaningful and sustained tariffs on the US’s neighbors—Mexico and Canada.

How do we invest?

Our base case for the US economy is for “growth despite tariffs.” While we will be closely monitoring for risks, we do not believe that the tariff measures outlined in our base case would be sufficient to derail US growth. Nor do we believe that such tariffs would preclude inflation continuing to fall from current levels, enabling the Federal Reserve to cut rates by 50bps later this year.

Tariff risks, US fiscal policy concerns, and shifting expectations around inflation and Fed policy are likely to keep equity markets volatile in the near term. But we believe it is most likely that a combination of resilient US economic activity, solid earnings growth, lower borrowing costs, and the potential for greater capital markets activity will lead stocks higher over the balance of 2025. In our base case, we see the S&P 500 reaching 6,600 by December.

Meanwhile, long-end rates have moved higher since the US election owing to a repricing of Fed rate-cutting expectations and fiscal concerns. Yields have come off their peak in recent days, but we believe they still offer an attractive entry point to lock in yields. We favor high-quality segments, particularly government and investment grade bonds. In our base case, we expect the 10-year Treasury yield to fall to 4% in 2025.

In currencies, elevated investor positioning and the dollar’s high valuation mean that we still see potential for dollar weakness over the balance of 2025. However, robust US economic data and ongoing uncertainty around the extent and nature of tariffs appear likely to keep the currency strong in the near term. In our base case, we forecast EURUSD at 1.02 in June and 1.06 in December.

11 Dec 2024

Trump's return to DC promises an economic rush—tax cuts, spending plans, and a more business-friendly regulatory environment. As this high-stakes economic experiment unfolds, what's the year ahead going to look like for business owners?

External view  |  09 Dec 2024

The United States is preparing for Donald Trump’s second turn at bat. With cabinet picks arriving at record speed and an agenda built on four years of reflection, what will the first 100 days look like?

This interview contains views which originate from outside Chief Investment Office Global Wealth Management (CIO GWM). It is therefore possible that the interview does not reflect the views of CIO GWM.