Market update: Turmoil after “Liberation Day”
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Article Type
Market Updates
Topic
Macro
Published
April 08, 2025
Read time
5 mins
Authors
Jordy Hermanns, CFA
Jacob Vijverberg, CFA
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In the past days global financial markets have experienced a sharp repricing of asset prices. When investors realized that Wednesday’s Rose Garden announcement was less of a “Liberation Day” and more a “declaration of trade war” markets quickly repriced. Below we summarize the expected economic impact and the initial financial markets impact.

 

Economic impact: Recession risk sharply increased

 

We believe the tariffs have significant macroeconomic implications for the US (see: Tariff man strikes again) and for Europe (see: Liberation Day Blues: Impact on Europe).

 

On “Liberation Day”, the tariffs announced were significantly higher than anticipated. For instance, tariffs on Chinese goods will approach 60%, which will undoubtedly cause substantial disruption to trade. Additionally, the European Union faces tariffs of 20%.

 

This situation goes beyond just the exorbitant tariffs; the economically illogical reasoning behind the figures on the tariff posterboard has rattled investors. It has reinforced fears that the administration truly believes this is sound economic policy, raising concerns about what future (economic) policies may originate from Washington in the coming years.

 

The tariffs, but more so the uncertainty they introduce, will likely result in reduced business investments and potential layoffs. Similarly, consumers may delay their spending. The US economy was already experiencing a slowdown due to the withdrawal of fiscal support and the depletion of savings accumulated during the pandemic.

 

While the EU's economy will be less affected by the tariffs compared to the US, it remains vulnerable due to its many external dependencies.

 

We anticipate that both the EU and US are on track to enter a recession in 2025, especially if the current trade uncertainties are not promptly resolved.

 

An environment characterized by low or negative growth poses risks to corporate earnings, as well as to highly indebted corporations and governments.

 

Government bonds: Lower rates in Europe

 

Government bonds worldwide have started to price in weaker growth after the larger than expected US tariff announcement last week and the ensuing flight to safety exacerbated the move lower in yields. 10-year German bond yields have dropped by more than 20 basis points (bps) and are now at pre-German debt brake reform levels. Most of the risk-off rally has been concentrated at the front end of the curve, with 2- and 5-year yields dropping more than 10- and 30-year yields, as the market expects and starts to price in more rate cuts coming from central banks. Intra-EMU spreads were well behaved and have not seen a substantial widening. Italian and French spreads have widened roughly 10 bps and 8 bps versus German bonds, respectively. Euro government bond demand will likely remain elevated as long as the tariff issue is not resolved.

 

Credit markets: Some spread widening, but not near recessionary levels

 

Credit spreads have moved significantly wider, to the tune of 20-50 bps for investment grade credits. Interesting to note that the move has been pretty indiscriminatory, i.e., not a lot of decompression: one telling statistic is that BBB bonds on average have moved by the same amount of basis points as single-A bonds.

 

High yield spreads have widened 110 bps since the lows early March (270 bps). In High Yield we do see decompression with single-Bs widening larger than BB widening. Looking forward, outflows will be very closely monitored, as it is an important driver of High Yield performance.

 

We anticipate spreads to widen further in the near future as the increased risk of a recession needs to be priced.  Current spread levels are still too low, if the economy enters a recession.

 

Asset Backed Securities

 

The immediate market impact on European ABS was muted, especially when compared to most other market segments. Spreads widened about 5-7 bps in consumer ABS, 10-15 bps in senior CLO bonds and 20–50 bps in mezzanine CLOs. These spread moves are comparable to the European corporate credit markets. Trading activity was muted, with limited selling only. Most of the widening materialized in the form of wider bid and ask levels on broker balance sheets.

 

Further short-term price action is highly dependent on how this fluid situation develops, but expecting high volatility seems very reasonable.

 

Equities: Sharp fall from a still elevated level

 

Equity markets have been performing exceptionally well in the past years, riding a wave of investor confidence and robust economic growth. The recent surge in investor sentiment around AI innovation further propelled markets to new heights. This enthusiasm, however, has abruptly shifted.

 

Since mid-February, investors have been beginning to account for economic headwinds, including the adverse impacts of tariffs and a broader economic slowdown. The equity markets repricing accelerated last week, after the “Liberation Day” announcement. World equities have now declined around 20% from their peak in February. Despite this significant drop, earnings multiples remain elevated.

 

As we look ahead, there is a possibility that equity markets might experience a brief rally if the White House decides to lower or postpone tariffs. Nevertheless, the more important concern is what other policies will be pursued in coming years.

 

We anticipate that both the economy and corporate profits will face negative repercussions. Given the combination of elevated earnings multiples and policy uncertainty, we remain cautious on equity markets.

 

Listed Real Estate: A more defensive asset class

 

Despite the marked correction seen for listed real estate, the sector still benefited from its defensive characteristics versus equity markets in recent global turmoil. In addition, most of the sell-down for the sector took place in the US, where markets have to deal with both an inflationary tariff, i.e. pressure on margins of tenants, and a consumer and producer confidence impact. In Europe, listed real estate’s rate sensitivity led to an initial positive knee-jerk reaction on Thursday after which it followed the overall decline in markets as from Friday. In addition to rates, the more muted impact versus equities can also be attributed to a more reasonable valuation level.

 

Going forward, a lot will depend on further events. Main residual risk remains financing. We have seen lending spreads widen and as these move further out this would become a drag for a capital-intensive sector like real estate.

 

Commodities: Lower demand and increased OPEC production

 

The tariffs triggered widespread declines in commodity prices due to fears of reduced demand and economic stagnation, with oil, metals, and agricultural products being particularly affected. Oil prices fell to their lowest levels since 2021, with Brent crude and US West Texas Intermediate futures dropping over 10% within a week. This decline was exacerbated by increased production plans from OPEC+ countries. Metals like copper, which are closely tied to economic growth, experienced sharp declines as well. Gold initially dipped amid broader market sell-offs but showed resilience as investors sought safe-haven assets during heightened volatility.

 

Tactical Asset Allocation: Defensively positioned

 

Our tactical positioning is relatively defensive. Our general tactical positioning for most of 2024 and early 2025 was risk-on, with tactical overweights in credit categories. In the past months, we have gradually reduced and neutralized these positions. In the past weeks, we have tactically added short risk positions, mostly by an overweight towards fixed income versus equities in the cross-asset allocation and by underweighting certain credit categories. For more detailed insights, view our update on the Global Houseview (see: Global House View - April 2025).

Disclosures

Authors

Jordy Hermanns, CFA
Portfolio Manager
Jordy Hermanns, CFA, is a portfolio manager in the multi-asset group and serves as an investment strategist in the asset allocation team.
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Jacob Vijverberg, CFA
Head of Asset Allocation
Jacob Vijverberg, CFA, is head of asset allocation. He is responsible for both strategic and tactical asset allocation. The team is managing a wide range of multi-asset funds  
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