It's been a challenging month for financial markets. Donald Trump's escalation of trade wars - notably regarding China - his endless policy announcements, and U-turns have created enormous uncertainty, leading to a loss of confidence for investors and the economy.
A US recession is now a distinct possibility. Given the new reality, we have lowered our growth forecasts for 2025 and 2026. The US and the world are expected to have less growth and higher inflation over the forecast horizon.
To add insult to injury, the White House has also multiplied the attacks on the Fed President, openly looking for ways to fire him as he refuses to cut interest rates as requested. Markets perceived these attempts as a threat to the central bank’s independence, which undermined confidence in the US dollar.
And given that foreign investors have stayed away from US debt markets, US yields – which usually fall every time investors seek shelter from heightened volatility in stock markets – have risen, even as stock markets and the USD fell.
European bonds performed well
This has led to major losses (>5%) across US bond markets, partly currency-driven (the USD lost about 4.8%) but also yield-driven (7-10 year bonds reached 4.3%).
The Chinese bond market has also tumbled despite falling yields. In this case, the fall was driven exclusively by losses on the yuan.
Other bond markets have performed better, with Swiss bonds, ever the haven of last resort, leading the pack, which is worthy of mention. Eurozone government bond markets have also done well, as investors looked for alternatives to the USD, and yields fell. However, the EUR High Yield is worried about the deterioration of economic prospects.
Most of the damage is done, and there is now a lot of bad news discounted at current USD rates. However, unless the situation deteriorates much further, the USD is likely to stabilize and even rebound. And suppose the situation turns into a full-blown global economic crisis. In that case, the US economy is expected to rebound faster than most, meaning that investors will seek haven in the US again.
Given the high yields on offer and the likelihood that policies will stabilize after this period of absolute mayhem, we remain invested in the US.
Stock markets didn’t react well
While the bond performance has been highly disappointing, the stock market response was less surprising but as painful. China lost over 10%. Elsewhere, several European and Asian markets lost somewhere between 5% and 8%.
This is driven by fears about the end of the globalization process and the fact that new barriers to trade may force the world's supply chains to rewire. Supply chains and companies will have to adapt, and in doing so, they may become less efficient as a whole and, perhaps more importantly for investors, turn companies less profitable. The loss of the US market (or at least reduced sales in the US) also hurts a lot of companies.
Domestic-driven markets had better performance
The outcome of all this is a negative month for financial markets. However, there is a silver lining: our view that we should invest in markets with strong domestic-driven demand has proved right.
Markets such as Poland and India have done relatively well, and others, such as Indonesia and Mexico, have also performed better than most. As we have seen recently, corrections and rebounds have been extremely violent. Staying invested is the only way to ensure we don't miss the rebound.
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