• US announces vast array of import tariffs
• Risk-off response from markets
• Equity position now neutral

This week, the news was dominated by "Liberation Day," the day when US President Trump announced significant import tariffs. The tariffs are considerable: a 54% tariff on Chinese goods, 24% on Japanese goods, 20% on those from the European Union, and 10% on goods from the United Kingdom. On average, US import tariffs will rise to over 25%. 

We expect that the economic consequences of this measure will be significantly greater for the United States than for the eurozone. In the US, almost all imported products will become more expensive, while the effect in other regions will be limited to a negative impact on exports to the US. For the eurozone, we estimate a growth slowdown of 0.25 to 0.5 percentage points. For the United States, we foresee a slowdown of 1 to 1.5 percentage points. Although the US economy is expected to continue growing, the risk of a recession increases. The ultimate impact will also depend on the course of possible negotiations and the destination of the revenue from the tariffs. 

 

If these are returned to households or businesses through tax cuts, it can somewhat mitigate the economic damage. For the US, the import tariffs also mean upward pressure on inflation, which can rise to 4%. However, we assume that this increase will be temporary, especially if economic growth slows down. In the eurozone, we expect a limited inflationary effect. While countermeasures can lead to higher inflation, a reorientation of Chinese exports towards Europe can actually reduce inflationary pressure. 

 

The Federal Reserve is in a difficult position: it must navigate between rising inflation and a slowing economy. Financial markets are currently expecting four rate cuts this year, which may be on the high side given the Fed's cautious stance. In the eurozone, three rate cuts are priced in. These are less pronounced, as economic growth remains weak, and inflation continues to decline. 

On the financial markets, fear of lower growth is dominant. Growth concerns and expected easing of monetary policy have led to a decline in interest rates. In the US, the two-year rate fell below 3.6%, the lowest level since September last year. The ten-year rate dropped to 3.9%, with the decline in the real rate indicating growth concerns. In Germany, the two-year rate fell to 1.8%, a level not seen since October 2022. The German ten-year rate is now approaching the level before the announcement of the fiscal plans. Further rate declines seem possible from this point only if economic growth significantly disappoints. The stock markets took a big hit. The S&P 500 lost over 9% in two days, on top of previous losses. The 'Magnificent 7' were particularly hard hit, with a decline of over 25%. The European STOXX 600 also lost 8% in two days and is 12% below the March peak. 

 

The recent decline in stock markets has led to a further decrease in our equity weighting. Although we recognize the downside risks of a possible trade war, we have chosen not to further reduce our equity position significantly at this time. Should the announced tariffs become a subject of negotiation, it would be a positive surprise. Conversely, extensive countermeasures represent a negative scenario. An expansion of our equity position is currently deemed premature, particularly given the increased downside risks to US economic growth. 

Please find attached our last Asset Allocation Update for April.