Are We Feeling Liberated Yet?
Authors: Andrés Larios, Faith Spalding
Editors: Andrés Larios, Faith Spalding
Intro:
Welcome to the Weekly BluRB, a newsletter catered to students and professionals seeking the latest news and insights on global markets. Get prepared for the week by reading four stories circulating around equity markets, macro trends, geopolitics and new business developments. And the best part: we’ll give you an informed view about where we think prices, policy and trends are going in the near future. The content in these writings is for informational purposes only and does not constitute financial or investing advice.
Equity Markets: When is the Bottom?
We are deep in red territory. The S&P 500 is trading more than 1000 points down from its peak, the Dow Jones Industrial Average is down 4000 points over the past three days and the Nasdaq Composite is down 22.3% from its 2025 peak. Why are markets stepping into bear territory, despite already losing the majority of the ‘Trump gains’ by mid-March following tariff uncertainty? More tariff news. On Wednesday, April 2nd, President Trump’s long-awaited Liberation Day announcement came, and it’s safe to say the announcement rattled markets. President Trump announced 34% tariffs on China, 20% on the EU, 46% on Vietnam and 32% on Taiwan, as well as a blanket 10% tariff on all trading partners.
No one was exempt from these announcements, and the market reacted accordingly. The Volatility Index (VIX) spiked to $52 (at the time of writing), highlighting the sell-off currently occurring with the S&P 500 and market uncertainty regarding when the index’s losses will bottom out. Investors consider VIX readings greater than $20 as signs of real market uncertainty. Looking at Figure 1, we can see that in the past 20 years VIX has only traded at more than $50 following the Great Financial Crisis and at the onset of the COVID-19 Pandemic. The big question is, is this the worst pain we are going to face, or is there more to come? So far there is no clear consensus.
Figure 1: Volatility Index
China matched the 34% increase in tariffs listed by the United States, and President Trump has not backed down, stating, “If China does not withdraw its 34% increase above their already long term trading abuses by tomorrow, April 8th, 2025, the United States will impose additional tariffs on China of 50%, effective April 9th. Additionally, all talks with China concerning their requested meetings with us will be terminated!” This means that China, the United States’ third largest trade partner and biggest economic competitor is not backing down. However, the United States is very serious about reducing their trade deficit, even if that means maintaining extremely restrictive trade practices with China. The spillovers of this deteriorating trade relationship could be grave, not only due to the US’s reliance on cheap manufactured goods from China, but also because of shifting geopolitical relations that could close off the United States from international trade, most notably the EU’s dynamics with China.
Other countries have already begun negotiations with the United States to ease the burden of these global import taxes. The EU, Japan, Vietnam, Bangladesh, India and Israel (and many more trade partners) have all publicly stated their intentions to negotiate with the United States and lower their trade barriers for US goods. If these negotiations are successful, this would lower the United States’ access to foreign markets, increasing their exports and reducing the trade deficit. This would put upward pressure on GDP, while also strengthening the US manufacturing sector as they see more outflow for lower prices. However, when these effects would kick in for equity markets is the million dollar question.
Figure 2: Supply and Demand Model of a Tariff in a Domestic Economy
We believe that equities will continue to struggle for the next few weeks or months as tariff news continues to roll in. The more certainty we get, the less grave the losses will be. Even so, it is crucial to note that these tariff episodes have placed a massive dent into the valuations of almost every major name, including Mag 7 stocks who outsource and sell in large part to China. We continue to believe our call to invest in companies with large balance sheets and less exposure to the US consumer is a robust tactical investing strategy, and also add the caveat to limit supply chain exposure to China, seeing as trade relations are poised to get more choppy. Companies who source from Vietnam, Cambodia, Bangladesh or India may have seen large bumps in the past few days, but due to ongoing negotiations between these countries and President Trump’s administration, are poised to bounce back at possibly higher valuations due to reduced barriers to trade.
Although uncertainty is definitely stemming from the United States, we still believe that it is smart to hold your positions in US markets (whether that be stocks, bonds or treasuries). The United States still controls its terms of trade with every nation in the world except for China, Russia and North Korea, and trade partners determine on American partnerships for their own economic security. This means they will be determined to resolve all tariff impositions as quickly as possible. Other developed markets like the European Union have poor tailwinds and geopolitical uncertainty regarding the Russia-Ukraine conflict, and China’s economic outlook has deteriorated in the past year even without tariff uncertainty. There is no market as large, liquid or diversified as the United States, and if you didn’t sell your positions before President Trump’s flurry of announcements, there is no point in selling now. Riding the storm will be scary for young investors, but will be worth it if the Trump Administration, the Federal Reserve and American financial institutions and corporations collaborate to ensure a steadfast recovery. Now is not the time to buy unless you have properly done your due diligence on a stock, and it is definitely not time to sell.
U.S. Economy: Separating Noise from the Data – Stagflation Watch Continues
After last week’s sweeping tariff announcements by President Trump, households are increasingly uncertain about the US economic outlook, and many are looking to the Federal Reserve for answers on how to continue cutting rates without unleashing a stagflationary episode. The effects of tariffs will take time to be reflected in the hard data, but for now we can only speculate on the effects tariffs will have on households. Last Friday, the Bureau of Labor Statistics (BLS) released its March reading for nonfarm payrolls, showing the US economy added 228,000 jobs, 88,000 more than Wall Street consensus. While this shows the strength of the US economy despite the tariff flurry of February and March, it has yet to account for Liberation Day, which surely will put more strain on the amount of job openings and hirings in the near future.
Tariffs are both inflationary and recessionary, meaning they increase prices and lower growth. This paints a very difficult picture for the Federal Reserve, the monetary authority tasked with stabilizing prices and growth. Federal Reserve Chair, Jerome Powell, spoke on Friday addressing the economic outlook and tariff pressures:
Looking ahead, higher tariffs will be working their way through our economy and are likely to raise inflation in coming quarters. Reflecting this, both survey- and market-based measures of near-term inflation expectations have moved up. By most measures, longer-term inflation expectations—those beyond the next few years—remain well anchored and consistent with our 2 percent inflation goal. We remain committed to returning inflation sustainably to our 2 percent objective.
Here, Jerome Powell acknowledges that the current Fed Funds rate at 4.25-4.50% is a good mid-point between short-term and long term inflation expectations. He acknowledges that tariffs will place one-off price increases on goods and services, but in the long run, the current policy rate is poised for equilibrium.
While tariffs are highly likely to generate at least a temporary rise in inflation, it is also possible that the effects could be more persistent. Avoiding that outcome would depend on keeping longer-term inflation expectations well anchored, on the size of the effects, and on how long it takes for them to pass through fully to prices. Our obligation is to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem.
Chair Powell realizes that tariffs are bound to create almost immediate inflationary pressure, however aims to ensure that there is only a one-time increase in prices, a more stable economy and the Fed’s continued goal to achieve its dual mandate of maximum employment in stable prices. Hence, the Fed is bracing for more inflation and slower growth after President Trump’s Liberation Day announcement, however, the long run monetary policy reaction is still uncertain.
Figure 3: Target Rate Probabilities for May 7th Fed Meeting
Even so, the probabilities shown above are drastically different from a week ago, pre-Liberation Day, where there was almost a 99% chance of the Fed holding rates steady. This comes as traders expect the growth outlook to be affected more than the inflation outlook due to mounting uncertainty, rather than concrete trade plans going into effect. Hence, while the market was expecting one or two rate cuts in 2025 just a month ago, now they are pricing in four to five. This also comes on the heels of President Trump using his social media platform to pressure Chair Powell to cut rates. Some see this as a move for Chair Powell to bail the Trump Administration out and prevent a recession. We believe the Federal Reserve will hold rates at the current target rate on May 7th.
Seeing as the top 1% wealthiest households in the United States own $16 trillion in stocks and the bottom 50% of households own just $300 billion, it is worth noting that the large stock market corrections we are seeing are affecting the top percentiles of earners. For the average American, however, while they may be feeling some pain from the stock market sell-off, they can also be happy that oil prices have dropped roughly 15% in the past few days. This will translate to lower prices at the gas tank and lower input costs for US corporations, as well as lower utility bills (through natural gas prices also falling). Seeing as oil is a leading indicator for US inflation, this is a good sign that the current consensus that trade uncertainty will drag growth more than increase inflation is in fact playing out. This, paired with OPEC+ continuing to expand production, means that oil prices have more room to fall.
Even so, because oil and other commodity prices are falling on a reduced global demand outlook, recession continues to be likely as a result of this global trade shake-up. We continue to think that uncertainty as a form of fiscal guidance is at play by the Trump Administration, and that they will agree to favorable trade terms when negotiating countries bring these terms to the table (as most seem to be doing). This fiscal guidance will have a more negative effect on spending, and accordingly growth, as households and businesses continue to trim their outlooks and spending plans. While we still see a recession as the most likely outcome, we cut our probability of stagflation significantly, and believe that a recession will be less severe than initially expected. Even so, to monitor these developments, keep an eye on credit spreads that are wholly dependent on corporations’ current balance sheet size and ability to provide cash flows and watch out for CPI and PPI releases this Thursday and Friday, respectively.
Global Macro: Tariff Takedown – Who Will Win? (Spoiler: We’re all losing)
Tariffs are once again at the top of our agenda item. As the Trump Administration refuses to back down from its drastic tariff measures, international markets continue to be volatile. Last week’s $5 trillion wipeout was one for the history books; major US stock indexes posted their steepest weekly declines since March 2020 after last Wednesday’s announcement of 34% tariffs on goods imported from China and 20% tariffs on goods imported from the European Union. The announcement triggered major sell-offs Thursday and Friday, extending to continued global market losses Monday.
Figure 4: Global Equity Market Reactions since President Trump’s Inauguration
Asia-Pacific Markets
President Trump’s 34% added levies on Chinese goods has triggered a retaliatory response from China; as of Friday China’s Finance Minister announced it was imposing 34% tariffs on all imported US goods starting April 10th. This brings the total of US tariffs against China to 54% – a shocking number. According to a translated report from Chinese state news outlet Xinhua, the Trump Administration’s maneuvers are, “inconsistent with international trade rules” and are putting “global economic development and the stability of the production and supply chain,” on the line. Beijing has also filed a formal complaint against the US with the World Trade Organization.
Major sell-offs continued following President Trump’s initial tariff announcement as Asia-Pacific stock markets have traded decisively lower this Monday. The Han-Seng index, Hong Kong’s market index, was down 13.2% this Monday afternoon. The Shanghai Composite closed 7.3% lower and Taiwan Weighted Index 9.7% lower, while Japan’s Nikkei 225 index closed with 7.8% decrease, and South Korea’s Kospi ended 5.6% lower. These numbers best exemplify the sheer impact of the Trump Administration’s tariff tirades. International expectations of a recession are rising, with JP Morgan expecting a 60% chance of a U.S. and global downturn. Asian markets are bearing the brunt of President Trump’s stubborn maneuvers; the Han Seng’s losses were its worst decline since 1997, almost wiping out gains for 2025 in totality.
Beijing remains defiant however, with foreign Ministry Affairs Minister Lin Jian accusing the U.S. of “typical unilateral and protectionist bullying.” President Trump doesn’t seem to be taking the comment well – just this morning he threatened an additional 50% tariffs on Chinese goods if Beijing doesn’t withdraw its 34% retaliatory tariffs. This would likely be untenable for Asian markets and the global economy, and could close off the United States from trade with China – a potential domestic economic disaster.
Japan’s Yen also has stood ground against the turbulence. As a safe-haven currency, many investors are flocking toward Japanese Yen and bonds. According to Jeff Ng, head of Asia macro strategy at Sumitomo Mitsui Banking Corporation, in a conversation with CNBC, the Yen usually outperforms in times of global recessions or crises. However, there is still some uncertainty in Japanese Yen stability, due to the Bank of Japan’s fed rate hike, raising short term rates from 0.25% to 0.5% in January as part of a massive stimulus program as a result of inflation rising above the BOJ’s 2% inflation target, adding uncertainty to Japan’s long term rates and currency valuation.
European Union
EU markets have continued to drop accordingly with President Trump’s blanket announcements of 10% tariffs on all imported goods, but are likely to put on a united front over the next week, seeking countermeasures of over $28 billion against the United States. As of Monday, EU ministers have met in Luxembourg to discuss retaliatory measures, with Sweden’s trade Minister Benjamin Bousa remarking “All options on table right now.” Like Sweden, many EU countries are in favor of countermeasures. France’s President Emmanuel Macron has made recent calls to halt investment with the US, while the United Kingdom’s Prime Minister Keir Starmer’s main goal is protecting Great Britain from major turbulence through a restrained approach so far.
The goal of the EU seems to be unified negotiation before retaliation – ministers are hoping that today’s unity will be the start of a joint effort to mitigate volatility. EU President Ursula von der Leyen stated today that despite this being “a major turning point for the United States,” the EU stands “ready to negotiate.” This comes as European markets continued to sink Monday for the fourth week in a row, with the pan-European index European Stoxx 600 down by 4.5% at market close. France’s CAC 40 and Germany’s DAX had similar continued losses, shedding 4.8% and 4.13% respectively.
Just like the volatility in US markets, the long-term outlook for international markets remains unclear; the immediate reality is that European equities have plunged farther than in March of 2020. As such, safe haven assets have made gains in the last week as investors brace for continued uncertainty. This Swiss franc continues to rise over the dollar, while the British pound continues to tread water. According to Intesa Sanpaolo analyst Luca Cigognini to Euronews, “Risk aversion dominates the currency market.” With no end in sight to the volatility and President Trump’s tariff gains, risk aversion may be the name of the game.
Russia
For now, Russia and Belarus have been spared from President Trump’s tariffs. But that doesn’t mean Russian markets are safe; following President Trump’s Wednesday announcement, billions of rubles were wiped off of the Russian Stock Exchange. Slumping Russian markets are a clear indicator that no one is safe from the ongoing chaos, additionally posing potential problems for Russia’s ability to fuel its ongoing war in Ukraine. The country has already taken massive economic hits as a result of tariffs imposed as a result of Russian aggression in Ukraine, where the EU has enacted countermeasures against the country since the 2014 annexation of Crimea.
Since the 2022 Russian invasion of Ukraine, countermeasures have included expanding financial restrictions by cutting Russian access to major capital markets as well as prohibiting the listing and provisioning of services related to state-owned Russian entities on EU trading venues. The capitalization of the Moscow Exchange (MOEX) companies experienced over $23 billion in losses Friday. The index tracks 43 of Russia’s main publicly traded companies, experiencing losses of over 8% last week, the biggest drop since Vladmir Putin’s 2022 mass mobilization of Russian markets.
While Russia may not be dealing with President Trump’s tariff maneuvers firsthand, a global slowdown caused by tariffs will continue to hit markets hard. Shares in Russia’s biggest power firms have tanked in the last week — steel and coal monolith Mechel experienced 7% losses, and gas producer Novatek experienced 5.4% losses. Ural’s crude oil, Russia’s main exporting oil blend, slumped to $52 a barrel Friday. Thus it’s clear that tariffs mean added pressure for everyone, even if best frenemies Putin and President Trump avoid direct tariff clashes.