As tariff turbulence continues, we round-up what's happened in markets this week and how we are positioning portfolios.
- Global financial markets began the week in turmoil as they continued to digest the possible implications of sweeping tariffs announced by the US on 2 April. Although we witnessed a strong surge in global equity markets on Wednesday and Thursday, volatility is continuing at the time of writing (Friday morning), as weakness in US markets on Thursday afternoon has followed through to Asian markets overnight and European markets into Friday morning
- Moving back to the beginning of the week, by Tuesday's close, the S&P 500 had fallen -12% since the announcement of the “reciprocal tariffs” by the US, and close to -19% since its February highs, flirting with bear market territory (-20%). Global equities were down -11% (local currency terms) and -16.5%, over the same time periods.1
- Perhaps even more alarmingly, the US Treasury market began to feel the pressure with longer-dated bond yields rising at their fastest rate since March 2020. These moves alarmed markets because it indicated investors were having to sell perceived safe haven assets to raise cash, with gold also falling in value.
- This all changed on Wednesday when President Trump announced a 90-day pause on "reciprocal" tariffs. The one exception to this announcement was China, which now faces even higher tariffs of 125%.
- The equity market reaction to President Trump’s announcement was swift and positive, with the S&P 500 posting its biggest daily gain since 2008, up +9.5% and the Nasdaq having its largest daily move in 24 years. Other regions followed suit on Thursday. Japan posted an +8% gain and UK and European markets opened strongly, although gains were pared back as US markets opened lower, with the S&P 500 falling -3.5% on the day.1
- Market commentators have pointed to the stress in the US Treasury market as a possible catalyst for the 90-day pause in tariffs, giving countries more time to negotiate trade deals with the US. President Trump was quoted as saying "the bond market is very tricky".
Outlook
- While the news of an 11th hour reprieve on reciprocal tariffs is positive for markets and was greeted with an historic equity rally on Wednesday, volatility and uncertainty continue as markets navigate the ever-changing landscape for global trade.
- With a 10% tariff still in place across the board for all imports into the US, which represents the largest tariff increase in decades, and heightened trade tensions between the world's two largest economic powers, the prospect of further disorder in global trade relations seems set to continue.
- Interestingly, although equity markets initially viewed recent market events as positive, Treasury markets have seen less of a recovery, with yields remaining stubbornly higher.
Our positioning
- In anticipation of 'Liberation Day”, in portfolios where we have active discretion, we have maintained a more defensive tilt in order to provide protection for investors in this volatile and uncertain environment.
- We remain underweight equities, specifically in the US and Europe, while we have structured our active fixed income positions to be more sheltered from rising US bond yields, which have been driving long-end bond prices lower.
- We continue to monitor the situation on an ongoing basis to ensure the portfolios remain positioned appropriately. While cautious, we are still looking to add value in the prevailing environment where we have active discretion.
- As longer-term investors, it is important to remain calm in these volatile and uncertain times. We continue to remain confident that financial markets can provide the growth required by investors to meet their long-term goals.
