.jpg)
- A last-minute reprieve for markets from White House
- European Central Bank still expected to cut rates
- Companies with strong balance sheets, minimum exposure to tariffs, domestic content manufacturing and supply chains and solid revenue backlogs remain in focus
Andrew Craig, Co-Head of the Investment Insights Centre at BNP Paribas Asset Management:
“Donald Trump reversed high tariffs on most nations – at least for 90 days. The last-minute reprieve from the White House now puts the focus on China, the second-biggest provider of US imports, for which the pause does not apply.
Instead, Trump has raised tariffs on China to 125%, while China has announced tariffs of 84% on all US imports
At this stage, it appears that the radical package of tariffs announced by the US administration on 2 April ultimately became unsustainable economically, financially and politically for the US president.
Stock markets soared on the news with the S&P 500 closing up 9.5% for its best day since 2008. The Nasdaq Composite rose 12.2%, its biggest one-day gain since 2001.
The reaction in US bond markets was muted with the focus on the pace of inflation running well above the Federal Reserve’s target and Fed policymakers unlikely to cut rates in the coming months.”
Impact of tariffs
“The US now has a 10% baseline tariff on imports from all countries, including the European Union, with exemptions for chips, copper, lumber, pharmaceuticals, bullion, energy and minerals not found in the US.
The 125% levy on Chinameans China's exports to the US, amounting to a significant part of China's GDP, will be largely eliminated. The scale of tariffs appears too large for any exporters or consumers to absorb and will be hard to completely offset by currency depreciation. China has responded by announcing a levy of 84% on US imports, now in effect, escalating the trade war between the two countries and heightening uncertainty.
Severe negative economic consequences are still expected globally, most notably for the United States itself. Other countries stand to be significantly less affected, with the European Union (EU) only moderately impacted by comparison. Next week the market will continue to grapple with the magnitude of the uncertainty created by events since Liberation Day on 2 April.”
Yields of US Treasury bonds rise
“The 10-year US Treasury yield ended the day slightly higher at 4.34%. The 30-year yield fell 0.43 basis points to 4.73%.
These moves meant the 10- and 30-year yields fell from the highs reached earlier in the day, but they do not completely erase this week’s big jump in US bond yields. The US bond market remains focused on the inflationary impact of the tariffs that remain in place at a time when inflation remains above the Fed’s objective.
The 2-year yield, which moved with interest rate expectations, jumped to its highest level since late March, as markets priced lower the probability that the Federal Reserve will cut interest rates this year. It ended the US trading day up 0.18 basis points at 3.9%.
President Trump referred to the situation in the bond market in explaining his change of mind on Wednesday, saying “The bond market is very tricky, I was watching it . . . people were getting a little queasy.”
Prior to the tariff reprieve, upward pressure on long-end US bond yields may have been due to rising concerns around weaker foreign demand for US Treasuries as US trading partners typically recycle profits into US treasuries. With trade effectively ceasing under the tariffs initially envisaged this may not have continued in the same way.”
European Central Bank expected to cut rates
“We expect the ECB to cut its key deposit rate by 25 basis points to 2.25% at their meeting on 17 April. With amplified downside risks to growth, recent remarks from policymakers suggest to us that the bar for a cut may now be lower than previously assumed. Under these circumstances our macroeconomic team think the ECB could lower its policy rate to a range between 1 - 1.5%, if, as expected inflation falls in the coming months. We remain overweight core eurozone sovereign portfolios in anticipation of weaker growth and inflation.”
Portfolio positioning
“Prior to the pause on the imposition of the tariffs our equity portfolio management teams had reduced risk by trimming those positions vulnerable to a growth and/or tariff shock.
Where appropriate, equity portfolios have been rotating capital towards companies with strong balance sheets, minimum exposure to tariffs, domestic content manufacturing and supply chains and solid revenue backlogs given both revenue and earnings visibility.
We have also shifted positioning in equity portfolios to favour large cap companies with so-called long-cycle exposure.
In multi-asset portfolios our equity exposures remain broadly neutral relative to benchmarks. We continue to overweight gold and await more clarity on US policy before increasing fixed income risk positions.
Our fixed income team still expect the US Federal Reserve to remain on hold, looking to manage the competing risks of higher inflation relative to weaker growth. Ultimately, we expect bond yields to fall as the negative impact on US growth becomes apparent.
We would expect the negative consequences for growth and employment to become apparent by September at the latest. This would lead the US Federal Reserve to continue cutting policy rates. We are positioning sovereign bond portfolios such they are overweight 5–7 -year maturities in anticipation of a cycle of rate cuts by the Federal Reserve from October onwards and through into 2026.”
