Summary

If the onset of tariffs was a major headwind for the markets, then the easing of them should be seen as a tailwind. Globalisation allows countries to specialise in activities in which they have a comparative advantage; doing so increases global economic growth, allowing each country a larger individual share of that growth.

With that in mind, the news over last month was dominated by the lifting of trade restrictions. After Liberation Day, it’s become increasingly clear that the Trump administration is seeking deals that lower tariffs, but questions remained over which countries it dealt with first, when this was done and how much tariffs would be lowered by.

Since Liberation Day, President Trump has announced the deferment of the most painful individual tariff rates, causing a sharp rally. He announced a “full and comprehensive” trade agreement with the UK. Additionally, as you may know, China was hit with effective tariff rates of 145% and the promise of additional curbs on the semiconductor supply chain, but a sharp decline in this tariff rate was announced quickly as the countries agreed to pause the extreme tariffs on each other for 90 days.

As far as we can tell, these agreements are verbal at this stage, and details will be agreed over the coming weeks.

Most UK car exports to the U.S. will be tariffed at 10% and there were some agreements on aeronautical deals (the U.S. buying engines from the UK and the UK buying planes from the U.S.). The cost of these easements is that the UK has had to drop some agricultural tariffs – it will probably adjust its digital services tax, too.

The overall impact of these measures is likely to be very small, though. This is partly because the most significant measure, the 10% universal tariff rate on all (now most) exports to the U.S., will remain in place, so the average tariff rate has only come down a little bit. Moreover, the UK runs fairly balanced trade with the U.S. anyway, and so the initial measures didn’t really affect us that much. Achieving big gains from trade is now much harder than it used to be, since the most significant barriers have already been dismantled.

Declining tariffs are generally good news, but the UK deal suggests that trade with the U.S. is likely to be subject to a minimum tariff level of 10% on most goods.

The UK also agreed a more conventional trade deal with India after three years of negotiation. The government says this deal will boost the UK’s gross domestic product (GDP) by £4.8bn by 2040. To put this into context, that’s only 0.19% of the UK’s current GDP. So, however things play out, this isn’t likely to be something that really moves the needle for the economy.

Overall, tariffs remain a force that’s likely to depress growth and increase inflation – but they’re set to decline from their current levels.

Shares continue to rally

The S&P 500 reached its all-time high on 19th February – just three months ago. Since then, the market has been on a wild ride. The S&P 500 dropped nearly 8% between Inauguration Day and Liberation Day (2nd April).

When Liberation Day came along, the confusing announcement of tariffs on every country America trades with – with rates varying between punitive and catastrophic – was taken poorly. The S&P 500 lost a further 12% of its value. Other global markets did better but still reacted negatively to the news.

President Trump now plans to overhaul the broad ‘AI diffusion rule’ implemented under former President Biden. The rule organises countries into three tiers, which all have different restrictions on whether advanced AI chips can be exported to the country without a licence. It seems that he plans on replacing it with individual deals negotiated with countries, however, the use of Chinese technology such as Huawei’s Ascend AI chips could prevent such agreements.

President Trump has been negotiating chips sale agreements with some Middle Eastern countries. The semiconductor deal-making continues to drive a huge rally in related shares, which has been aided by the general equity rally and change in tone on trade.

All this leaves the U.S. equity market 4% above its Liberation Day level, and just 4% away from a new all-time high at the time of writing.

Investors shouldn’t forget the reasons for a widely held overweight position in U.S. shares. Some U.S. companies are exceptional and offer unparalleled access to the technology and AI-enabled changes that will transform the economy over a few years. But they should remain aware of the damage done to America’s reputation as a trading partner. Investors will rethink allocations to U.S. assets, while reserve managers will rethink the need to hold U.S. debt. Small changes here can have big implications.

This mix of circumstances could allow the Federal Reserve to cut interest rates, but for now, it will want to see more evidence of modest inflationary pressures.

The effect on other assets

In addition to the above, other fallout from Liberation Day has been dispersing. A hot topic is gold, which has shown signs of slipping in value following two failed attempts to decisively breach $3,400 per ounce.

A mellowing trade war is bad news for gold, but the seemingly intact trend of diversifying away from the U.S. remains supportive. After the enormous rise, a brief consolidation seems healthy.

This month, bonds benefitted from the ebbing of inflation concerns due to reduced tariffs. The picture is very complicated with regards to U.S. treasuries, as they must balance worse inflation and worse growth. In addition to this and the potential reduced demand from overseas buyers, there’s also the prospect of changes in bond issuance.

The U.S. House Committee on Ways and Means (the Committee), which is responsible for writing tax law, released draft legislation this month. Although not all these proposals will become law – final legislation needs to be approved by Congress before going to the president to sign – it’s worth looking at what’s contained in this blueprint. By far, the costliest part of the tax package is the ten-year extension of the individual rate reductions, which are set to expire this year.

The Committee also included President Trump’s unorthodox tax cut promises of no tax on tips and no tax on overtime in the draft – but these are planned to last for only four years. President Trump had also promised to end taxes on Social Security benefits, but this has instead provided for a so-called ‘enhanced deduction’ for seniors on top of the regular tax deduction. The proposal also calls for no tax on car loan interest.

To offset the costs, the plan proposes reducing the state and local tax (SALT) deduction limit, which is currently capped at $10,000. Some Republicans from high-tax areas are likely to push back, as they favour higher deductions. The plan also eliminates several clean energy tax credits introduced under President Biden, including the $7,500 electric vehicle tax credit.

Overall, the plan increased the deficit by $3.7trn over a decade. It could be bolstered if the administration can restrict Medicaid coverage, and there will be benefits to the Treasury from funds raised by tariffs, but they’re not scored because they’re emergency measures rather than legislative ones.

Similarly, savings through the Department of Government Efficiency will reduce federal costs, but as the funds being saved have already been approved by the government, the administration is theoretically required to spend them. If these savings can be made to stick, that can be considered in future appropriations.

The outlook for U.S. fiscal policy is far from clear three months into the Trump administration’s mandate, and the quick win it sought continues to look elusive.

The U.S economy remains robust

Is the U.S. economy reflecting the extreme pessimism from consumers? Yes, to an extent.

Retail sales growth was muted but hardly collapsed. There was weakness in some sectors, particularly those affected by Chinese tariffs which, prior to their relaxation, had been acting as an embargo rather than a tax.

Retail sales data showed a slight increase in spending on electronics, which suggests that people have bought fewer goods for more money. In other categories, inventories are still masking the impact of measures. At a headline level, weak services prices – reflecting caution from U.S. consumers – are holding prices down.

UK Interest rate cuts

The Bank of England’s Monetary Policy Committee (MPC) probably had relatively little notice of the trade deal, and its effect was marginal anyway. Instead, the MPC has been focusing on an economy which has experienced relatively little growth momentum and a cooling inflation picture.

As an important caveat, there will be an increase in inflation over the coming months, which we have already seen at the time of writing, due to gas and electricity bills, but beyond that, disinflationary pressures seem set to bring the inflation rate back down towards target. Jobs growth has been softening and job postings have been declining. The cost of employees has risen due to the increase to Employers National Insurance contributions, and companies now have the options of absorbing the costs in their profit margins, passing them on in higher prices (inflation), or reducing their staff numbers.

This creates a lot of uncertainty, which was reflected in a three-way split when the MPC voted on whether to cut interest rates this month; two members wanted to cut interest rates faster and two wanted to stay on hold.

In the end, the majority decision was a 0.25% cut, but that uncertainty meant that markets reduced their expectations for future cuts for the time being. Interest rates are currently expected to fall from 4.25% to 3.5% or 3.75% by the end of the year.

US Tariffs effect on global markets

As we’ve seen so often before, the markets are climbing the wall of worry that was built by President Trump’s erratic behaviour during the first few months of his second term.

Interest rates have been falling in the Eurozone, have started to fall in the UK, and will likely fall in the U.S. too (eventually).

This month the U.S. Federal Reserve left interest rates unchanged (as expected) as the outlook for inflation is difficult to gauge due to the erratic trade policy environment. However, with equity sentiment quite depressed, the conditions for markets to continue climbing that wall of worry seem quite supportive in the short term.

Other Viewpoints

Cash

Interest rates have begun to decline following the Bank of England’s recent cut to 4.25%. Instant access savings rates remain around 4.5%, but fixed-term savings rates are slightly lower as banks anticipate further rate reductions. Analysts predict rates could drop to 3.25%-3.5% by the end of the year, with some forecasting as low as 2.75% in early 2026.

Fixed Interests

UK government bond yields have fluctuated significantly, with 10-year gilt yields reaching 4.9% earlier this year. While yields surged in response to global trade tensions, analysts expect them to decline as the Bank of England continues its rate-cutting cycle. The US bond market has also seen volatility, with hedge funds selling bonds to cover equity losses.

Alternatives

Gold prices have retreated from their recent highs, as US-China trade tensions ease. Central banks continue to diversify their reserves, but profit-taking among portfolio managers has led to some selling pressure. Despite this, gold remains a key hedge against inflation and geopolitical uncertainty.

UK Shares

UK equities have rebounded, with the FTSE 100 and 250 seeing good gains in the past month. Sectors previously impacted by tariffs, such as airlines and banking, have seen strong gains. The UK government is still negotiating trade deals to mitigate the effects of US tariffs, but investor sentiment has improved. The UK economy expanded 0.5% in February, with GDP growth at 1.4% year-over-year, reinforcing expectations of further interest rate cuts.

US Shares

The S&P 500 has erased its 2025 losses, surging on optimism over trade negotiations. The Nasdaq Composite entered a new bull market, driven by strong earnings from tech giants like Nvidia. However, uncertainty remains, with Trump’s tariffs still a major concern for automakers and other industries. Portfolio managers have reduced US exposure due to stretched valuations and policy risks.

European Shares

European markets have seen mixed performance, with the STOXX 600 extending gains amid easing trade tensions, while Germany’s DAX also saw gains. Investors remain cautious as the Bank of England and European Central Bank navigate interest rate decisions.

Asian Shares

Asian markets have rebounded, with Japan’s Nikkei 225 up following the US-China tariff pause. However, China remains under pressure, with tariffs still impacting exports. The Hang Seng Index surged, driven by optimism over trade talks. Despite the rally, China’s Commerce Ministry has vowed to fight US tariffs, maintaining a cautious outlook.

Emerging Markets

Emerging markets remain under pressure, particularly commodity-dependent economies. Oil prices have plummeted, adding stress to these markets. However, a weaker US dollar has eased some risks, allowing central banks in emerging economies to consider rate cuts. Investors remain wary of trade disruptions and inflationary pressures.