Trump’s tariffs send markets plummeting

The tariffs, coupled with the government spending reforms in Germany, dominated investors’ attention amid growing concerns that the US could enter stagflation in the next two years. As a result, the slopes of sovereign yield curves steepened on both sides of the Atlantic in view of the likelihood of seeing short-term rate cuts and the prospect of higher public spending in the long term. Central banks adopted a cautious stance in this environment, although the implied money market rates reflect a more dovish monetary policy for 2025. The dollar weakened against major developed-market currencies, prolonging a trend which, against the euro, had already begun with the announcement of higher future public spending in Germany. The risk aversion caused sharp declines in the stock markets, especially in developed economies, while energy commodities and industrial metals also came under pressure due to demand concerns. This contrasted with the performance of gold, which capitalised on its role as a safe-haven asset.

Central banks recognised their growing dependence on the data and their limited ability to guide the market on future steps in this environment of exceptional uncertainty in economic and trade policy. After cutting rates by 25 bps in March (placing the depo rate at 2.5%), the ECB stated that rates were no longer clearly restrictive, given the 150-bp reduction accumulated since June 2024, and that at its future meetings it would act according to the data. Thus, after the implied money market rates anticipated a terminal depo rate of 2% following the announcement of higher spending in Germany, Trump's tariffs pushed ECB rate expectations back to the levels of earlier in the month, with an anticipated terminal rate of 1.75%. The Fed, meanwhile, kept rates stable (4.25%-4.50%), while investors went on to anticipate four rate cuts as the most likely scenario for 2025 following Trump’s tariff announcement, although after the pause announced on 9 April they finally settled on three cuts. The Fed revised its growth outlook downwards and its inflation outlook upwards, citing tariffs as a key factor, although noting that they are still assessing whether the impact on prices will be permanent.

The doubts surrounding US growth due to Trump’s tariffs, a potential deterioration in the US fiscal outlook and some movements related to the closure of speculative positions, triggered declines in short-term sovereign debt yields and rebounds in the longer segments of the curve. As for inflation expectations, they picked up in the shorter segments and declined in the longer term. All of this resulted in lower short-term real rates, highilighting investors’ concerns about an economic slowdown with inflation slightly above the Fed’s target. The European yield curve also saw a steepening of its slope: yields on the 2-year benchmarks fell sharply, while the longer segments registered increases on expectations of higher government spending in Germany, which later moderated as the EU delayed a coordinated fiscal agreement. Spreads in the periphery countries, which had remained stable following the announcement of higher public spending in Germany, which later moderated as the EU delayed a coordinated fiscal agreement.

The dollar dropped more than 4% against major peers, largely due to the aforementioned decline in short-term real rates and as investors continue to search for the new equilibrium for US assets. Although the depreciation was widespread against the major currencies, the strengthening of the euro was one of the biggest contributors (more than 5%) in a move that began with the announcement of a defence and infrastructure spending package in Germany. The Swiss franc acted as a safe-haven asset and appreciated around 5%, while appreciations were also recorded by the Mexican peso (+1.5%) and the Canadian dollar (+2.6%) in a context of high volatility. Among emerging currencies, the Brazilian real appreciated slightly due to high rates and low exposure to the US market, while the Turkish lira depreciated in a context of greater political instability.

Risk assets were the most affected, in a context marked by high uncertainty and fears of a slowdown in global growth, although they rebounded rapidly following the announcement of a pause in the reciprocal tariffs. In this up-and-down environment, the MSCI All Country World Index recorded one of the biggest setbacks in the month, sliding 9%. US indices followed suit, with small caps and domestically-focused firms hit hardest, as well as tech firms due to them being among the country’s top exporters. Finally, the main indices were down around 8%. The European indices also recorded losses, with the Stoxx 600 falling more than 15%, while the Iberian indices showed the best relative performance despite the IBEX 35 also closing the month with significant losses of around 11%. Emerging markets initially resisted the downturn, although it ended up affecting them all the same, with the MSCI Emerging Markets Index closing with losses of just under 10%. The main exception was the Latin American stock markets, thanks to the better relative performance of the Brazilian stock market and, to a lesser extent, Mexico’s.

Oil prices dropped over 10% in the month after Trump’s tariff announcement, amid doubts surrounding aggregate demand and the resilience of the cycle. Natural gas prices also plunged, with Dutch TTF futures falling over 20%, weighed down by expectations of greater supply in Europe given that Trump’s tariffs could have a bigger impact on Asian economies. Similarly, industrial metals showed some weakness in the month amid the prospect of dampened global demand, with aluminium and copper prices losing over 8%. On the other hand, gold benefited from uncertainty and its safe-haven appeal, ending the month up around 8%. Finally, livestock prices also picked up (+5%), as the tariffs are expected to increase the price of meat in the US.