This month written by Tom Day.

Summary

April has been a turbulent month for global financial markets, largely due to President Trump’s aggressive tariff policies. His administration imposed sweeping tariffs on imports from most countries, triggering sharp declines in stock markets worldwide and raising fears of a global recession. The measures announced were very much toward the more extreme end of expectations, and sent the markets spinning due to the uncertainty of what would happen as a result.

We’ve seen eye-watering ups and downs this month. US bond yields spiked, prompting Donald Trump to pause his tariffs for 90 days on all countries except China, which faces a whopping 145% – although somewhat lessened with the exemptions to smart phones and other electronics. Markets welcomed all tariff relief, but overall the average tariff rates are still high. The dollar slid, despite higher yields, suggesting the US may no longer be a safe haven.

Trump eventually bowed to pressure from markets and his allies. This was mostly about the US bond selloff – which felt like Trump’s ‘Liz Truss’ moment. This required the Bank of England intervention in 2022, and the Federal Reserve in the US may yet have to step in, as bond yields still haven’t fully recovered.

We will hope for some calm in the coming weeks and months, but with Trump at the helm, I don’t think we are fully out of the water just yet. The 90-day tariff pause could also obstruct tax cuts, as tariff revenues were supposed to fund them.

Investment banks are divided on whether a US recession is coming this year. Even with smart phone exceptions, the 145% Chinese tariff means huge disruption to global trade and can seriously hurt both the world’s largest economies. We could actually see a short-term consumption boost if Americans rush to buy in the 90-day window, but that wouldn’t change the fundamentally weaker outlook.

It’s a challenging environment for equities – with weaker growth prospects and more risk-averse markets. Trump stepping back from the brink is positive, but businesses and institutional investors will be wary of putting their money to work in the short term, meaning potentially lower trading volumes and choppy waters ahead. Despite the temporary relief from Trump’s tariff pause, global uncertainty remains high. Investors are closely watching trade negotiations, particularly between the US and China, as further escalations could trigger renewed market instability.

What’s going on?

At the end of March, a report was produced and based upon it, the Trump administration determined that every country exerts protectionist policies which the US needs to reciprocate. That includes 115 countries with an identical implied tariff on US imports of 10% which will be fully reciprocated, and 75 countries with implied tariff rates of greater than 10% which will be partially reciprocated with tariffs ranging from 10% to 50%. He has since paused most reciprocal tariffs for 90 days, giving some relief to markets and allow time for trade discussions between nations.

This comes after tariffs which President Trump introduced during his first term on China and metal imports. This year he has now further raised tariffs on China– reaching a cumulative rate of 145%. This includes tariffs related to fentanyl imports which also apply to Canada and Mexico. Sector specific tariffs of 25% have been announced on US imports of steel, aluminium, cars, and car parts.

How will this affect the US economy?

Despite the temporary pause, best estimates of the impact on growth from these tariff measures is that they could reduce US GDP by around 3% while prices are likely to rise by more than 1.5% due to the measures. These figures are relatively easy to estimate as they reflect the increase in prices and taxes. The potential offset to this would be if the government were to return the tariff revenue to the economy through tax cuts, which now seems more difficult to do as Trump will not be bringing in any revenue from the tariffs due to the 90-day suspension. Nevertheless, we should assume some US tax cuts which will partially offset the pain of these measures once everything is settled.

Ordinarily we would expect currency appreciation from the country imposing a tariff (less dollars get exchanged for foreign currency to buy imports) but it is interesting how the dollar has fallen sharply since it became clear President Trump would take on all countries simultaneously. This reflects the fact that US growth is expected to suffer more than the growth of US trading partners. The US will suffer an increase in taxes and prices relative to all of its trade. It will also face retaliatory measures from many countries. Trading partners will only suffer this in relation to their trade with the US.

The Federal Reserve will probably cut US interest rates this year, although with inflation potentially breaching 4% during 2025, it won’t be an easy decision, especially with the weak dollar.

Will these policies be effective in reducing the US trade deficit?

To some extent they will, but historically the US trade deficit has contracted at times when the US economy slows, so it can seem like a hollow victory. The reason America runs a trade deficit is because American consumers spend more than they save, something which is made possible by the Federal government paying out more in entitlements than it earns in tax revenue. These tariffs are substantial but still not enough for most emerging economies’ exports to be uncompetitive relative to US manufacturing. US productive capacity is insufficient to meet its domestic demand, and that situation will only worsen due to immigration curbs. Without immigration, America’s work age population is due to start declining. Therefore, it seems unlikely that these policies will spark the manufacturing revolution President Trump is trying to achieve.

What now?

There is no question that the impact of these tariffs is negative for the global economy. There are environmental and social consequences of trade, but it is economically positive, and its curtailment was never going to be good for the global economy. Trump has already signalled his willingness to negotiate and the unpopularity of prices increases should encourage him to come to the table, so it would not be surprising to see these tariff rates reducing over time in a succession of triumphant announcements.

How will this impact investments?

Markets have been bracing for this announcement for weeks. Now that it has landed it was towards the more extreme end of what investors considered possible and that has weighed on the markets since they have reopened. The impact on companies is complex and varies stock by stock. The impact does not depend upon where companies’ shares are listed, or even where they sell their goods, but rather where they manufacture their goods.

After two years of strong stock market returns a period of volatility reminds us why it is useful to include defensive assets within portfolios. Gold has given good protection although it is now suffering from profit taking. These periods of volatility are stressful, but they also offer opportunities, and it’s important not to panic and remember that investing is for the long term, and we’ve seen situations like this before.

Other Viewpoints

Cash

Although cash continues to offer decent rates, we expect interest rates to fall over the next few years, albeit perhaps at a slower rate than we initially expected. Instant access rates are available from 4.5% but fixed term savings are only slightly higher as banks don’t want to tie themselves into providing guaranteed higher rates in the future when they expect interest rates to be lower themselves.

Fixed Interests

Spiking government bond yields last week felt like Donald Trump’s ‘Liz Truss moment’. The equity selloff after Liberation Day originally pushed bond yields down, as global growth prospects dwindled, but that was suddenly reversed the following week. China was rumoured to have started the bond selling, but it snowballed due to hedge funds selling bonds to cover their equity losses. The problem in US bonds spread to the closely correlated UK market – while European yields reacted more mildly.

Alternatives

Following the recent strong rally in gold, portfolio managers have taken some profits from this position. Central banks may continue to diversify their reserve holdings out of the dollar due to US uncertainty, so there may be some more potential upside to this.

UK Shares

UK shares have been significantly impacted by Trump’s tariffs, with markets reacting to the uncertainty surrounding trade relations between the US and the UK. The FTSE 100 and FTSE 250 have both experienced volatility, with sectors such as automotive, steel, and retail facing the most pressure. The UK is currently negotiating a trade deal with the US to mitigate the impact of Trump’s 10% tariff on British imports, and the UK government has announced a £10 billion support package to help businesses affected by the tariffs.

Additionally, the UK economy expanded at a faster-than-expected 0.5% in February with stronger services output being recognised for much of the growth. On a year-over-year basis, Gross Domestic Product (GDP) increased +1.4%, beating expectations. This faster growth has not changed the market view that the Bank of England will continue its path of further interest rate cuts over 2025.

US Shares

Things have changed drastically in the last few months with regards to US Shares. As expected, the Trump administration has effectively waged a trade war with most countries simultaneously, and they all seem ready to retaliate. The 90 day pause brought some relief, however there is still a lot of uncertainty surrounding what happens if the US and rest of the world can’t agree some trade deals. For this reason and others, including Trump’s immigration stance, stretched valuations, and a still richly valued USD, many portfolio managers have reduced their weighting in the USA. There is now also a risk that the dollar loses its reserve status. This is still unlikely, but it gets more likely the worse the policy outlook and the markets’ reaction gets.

European Shares

European shares have also experienced significant volatility in April due to Trump’s tariffs, with major indices seeing sharp declines as investors react to the uncertainty surrounding trade relations. The STOXX 600, which had its best first-quarter performance relative to the S&P 500 in a decade, has now turned negative for the year. The automotive and luxury sectors have been the hardest hit.

Asian Shares

Japan’s Nikkei 225 surged after Trump announced a 90-day pause on most tariffs, offering temporary relief to Asian markets. The broader Topix index also climbed as exemptions for consumer electronics boosted sentiment. However, despite the rebound, Japan remains cautious, as Trump’s 24% tariff on Japanese imports is still in place.

China has been hit hardest by Trump’s tariffs, with duties on Chinese imports increased to 145%. In response, China imposed an 84% tariff on US goods and halted exports of critical rare earth minerals, disrupting global industries reliant on these materials. China’s Commerce Ministry has vowed to “fight to the end” against Trump’s tariffs, calling them “unilateral bullying”.

Emerging Markets

Oil prices plummeted in the wake of the tariff implementation, adding further pressure on commodity dependent emerging economies. Again, emerging markets remain very cheaply valued.