- Macro Strategist
United States, Institutional
Change
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Key points:
- The latest US tariffs, announced on 2 April, have worsened the growth outlook from a US and global perspective.
- At the time of writing, the USD isn’t benefiting from its traditional safe-haven status — rather than rallying, it’s falling against most currencies.
- This may be the shotgun start for capital flowing out of the US.
Unpacking a groundbreaking policy change
My initial assessment of the sweeping tariffs the US presidential administration announced on 2 April is that they appear to be genuinely groundbreaking with potentially far-reaching consequences for financial risk assets, but I want to start by emphasising again how much could change. The extent of the US trading partners’ countermeasures — at time of writing, China has already announced a 34% tariff on all US imports — and the US administration’s tolerance levels for negative blowback in particular could alter the trajectory over the near and longer term. However, what we know is that the outlook is bad for growth, from both a US and global perspective, and markets have reacted accordingly. We see a clear risk-off move, with equities going down and bond rallying. However, what is interesting is that the US dollar is not benefiting from its traditional safe-haven status and rather than rallying, as you would expect, it is doing the opposite by falling against most currencies.
This could be a tentative sign that global investors may be reconsidering how they view the US. After all, why are so many of the world’s assets parked there? In my view, it is because the world’s largest economy offered growth, return and liquidity but also safety and credibility. Tariffs don't only hit growth in the short term; they also change how international investors think about what the US has to offer. How the US Federal Reserve (Fed) responds could be a critical part of this changing investor perception. I think that tariffs are putting the Fed in a difficult position. The growth shock may put pressure on policymakers to cut rates aggressively but that may raise demand and, with it, the impact of tariffs on prices, which would push up inflation.
What does this mean for non-US investors?
From a global investor’s perspective, this would imply that the US no longer offers the same protection against rising inflation. If the Fed keeps rates elevated to combat above-target inflation, it will face increased political pressure that could undermine its credibility, which again is a negative for investors. If investors conclude the US is henceforth likely to offer less growth, less return and less safety, we could see a structural reversal of capital flows to the detriment of the US, which would also translate into a significantly lower dollar and a higher risk premium. Much could change — it is not inconceivable, for instance, that President Trump could end up unwinding many of these tariffs — but at the same time, it is hard to negate the sense of rupture. In my opinion, there is a real possibility that we may have witnessed the shotgun start for capital flowing out of the US.
Europe can now engage in pre-emptive monetary and fiscal policy
The market reaction to date also suggests a historic shift in its perception of Europe and the euro area, in particular. Hitherto, in the event of a global shock, Europe always tended to be the weak spot, with recurring doubts about credit sustainability forcing the euro area into fiscal tightening. To date, we have not seen a repeat of that scenario. Instead, what we're seeing is a stronger euro and tight sovereign spreads. Investors appear to view Europe in a fundamentally different light since Germany agreed to a structural fiscal loosening. This means that Europe may finally be able to reposition policy pre-emptively and adopt a more pro-growth stance. I think this is an important development for investors to watch, especially if it were to coincide with a return of European investors’ capital from the US.
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Quarterly Market Review — 1Q25
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Brett Hinds
Jameson Dunn