The Week Before Tariffs: Markets on Edge Amid Trade Uncertainty and Economic Crossroads

What do we need to know for the week ended on 28th Feb 2025

💡 Highlight 💡

Global Equity Market Selloff Amid Tariff Uncertainty – Global stocks faced heightened volatility as US President Donald Trump reaffirmed plans for 25% tariffs on Canadian and Mexican imports, alongside a potential increase in levies on European autos. The STOXX 600 and STOXX 50 fell 0.5%, with European automakers among the hardest hit. Meanwhile, the S&P 500 and Nasdaq posted their worst monthly declines since April 2024 and September 2023, respectively, as investors assessed the implications of trade tensions and upcoming US inflation data.
Germany’s GDP Confirms Recession, Markets Eye Policy Response – Germany’s economy contracted by 0.2% in Q4 2024, confirming its second consecutive annual decline, following a 0.3% contraction in 2023. The downturn, driven by weak household consumption and net trade, fueled concerns over the Eurozone’s largest economy. Investors now await details on how the incoming government will respond, particularly regarding energy costs, infrastructure investment, and potential fiscal policy adjustments. The DAX slipped as uncertainty over economic stimulus weighed on sentiment.
Bitcoin Falls Below $92K as Risk-Off Sentiment Dominates – Bitcoin tumbled below $92,000, hitting its lowest level since November, as risk assets sold off amid a deteriorating global economic outlook. US stocks continued their slide, and concerns over the Federal Reserve's hawkish stance and escalating trade tensions further pressured crypto markets. The broader digital asset space followed suit, with Ethereum and other major altcoins experiencing sharp declines.
Oil Prices Rally on Fresh US Sanctions Against Iran – Brent crude climbed to nearly $75 per barrel, marking a second consecutive session of gains after the US imposed additional sanctions on Iran’s oil trade. Washington targeted over 30 entities involved in transporting Iranian crude, fueling concerns over tighter global supply. However, gains were capped by demand uncertainties, as Trump’s confirmation of new tariffs on Canada, Mexico, and China cast a shadow over global trade flows.

US Markets Grapple with Inflation, Rate Expectations, and Trade Uncertainty

The US economy continues to show resilience, expanding at an annualized 2.3% in Q4 2024, though at a slower pace than Q3’s 3.1% growth. Consumer spending remained the primary driver, rising 4.2%, the strongest since Q1 2023, with increases across both goods and services. However, fixed investment contracted more than initially estimated, with a steep drop in equipment investment, reflecting corporate caution amid rising borrowing costs and geopolitical uncertainty. While residential investment rebounded, overall economic growth is expected to slow further in 2025, especially as Trump’s escalating trade policies add new variables to the outlook.

Equity Markets Remain Volatile Amid Trade Tensions and Inflation Uncertainty

US equities saw a turbulent week, with the S&P 500 and Nasdaq posting their worst monthly losses since April 2024 and September 2023. Investors are closely monitoring Trump’s tariff actions, as he confirmed that 25% tariffs on goods from Canada and Mexico, along with an additional 10% duty on Chinese imports, will take effect on 4th of March. Meanwhile, Trump hinted at a tariff-free trade deal with the UK but signaled potential new levies on EU imports, raising concerns over retaliatory actions from key trading partners.

Markets briefly rebounded on Friday, with the S&P 500 and Nasdaq gaining 1.6% each, but sentiment remains fragile. Tech stocks, which had been leading the market, are showing cracks under pressure amid regulatory concerns and shifting investor sentiment. Microsoft and Palantir also weighed on the Nasdaq earlier in the week, reflecting concerns over weak data center spending and artificial intelligence-driven valuations cooling off.

Looking ahead, investors are awaiting the Federal Reserve’s preferred inflation gauge—the PCE price index—as well as revised Q4 GDP data, which could influence expectations for rate cuts later in the year. If inflation remains stubbornly high, it could dampen hopes for aggressive rate cuts, keeping pressure on equities.

Fixed Income: Treasury Yields Slide as Rate Cut Bets Increase

The 10-year US Treasury yield fell to 4.22% on Friday, hitting its lowest level since early December, as investors sought safe-haven assets amid trade uncertainty and weaker economic data. A series of economic reports hinted at softening momentum, including the Flash S&P Global PMI showing a contraction in the services sector, despite strong manufacturing growth. Additionally, consumer sentiment weakened, raising concerns that inflation and higher borrowing costs are weighing on household confidence.

Markets have now priced in two quarter-point Fed rate cuts in 2025, with expectations growing that easing could begin by mid-year. However, sticky inflation and Trump’s tariff policies could complicate the Fed’s path, as rising import costs could fuel price pressures, forcing policymakers to rethink their timeline for monetary easing.

Housing Market: Mortgage Rates Edge Lower, But Demand Remains Subdued

Mortgage rates continued their downward trend, with the average 30-year fixed mortgage rate dropping to 6.88%—the lowest since mid-December. The decline was driven by softer consumer spending data and easing Treasury yields, reflecting growing expectations for Fed rate cuts. However, homebuying demand remains weak, as affordability challenges persist despite falling rates.

Outlook: Will Tariffs, Inflation, and Rate Expectations Keep Markets on Edge?

The US market remains at a crossroads, with trade policies, inflation trends, and the Federal Reserve’s rate path all contributing to heightened uncertainty. Trump’s tariff plans pose a risk to corporate earnings and consumer prices, while investors are questioning whether the Fed will be forced to hold rates higher for longer. If inflation remains persistent and trade disruptions worsen, the equity rally could struggle to regain momentum.

For now, the focus will be on the upcoming PCE inflation data, Fed speakers, and key economic releases—including personal income and spending, durable goods orders, and revised Q4 GDP. Investors will also watch developments in global trade relations, particularly as Trump weighs additional tariff actions. With geopolitical uncertainty and economic momentum slowing, the coming weeks could prove pivotal in shaping the US market’s trajectory.

UK Retail Sector Faces Persistent Challenges While US Tariffs Cast a Shadow Over Market Sentiment

The UK retail sector remains under strain despite a slight improvement in sentiment. The retail sales volume gauge edged up to -23 in February 2025 from -24 in January, surpassing market expectations of -25, according to the CBI’s monthly retail balance. However, this uptick does little to mask the broader struggles of the sector, as weak consumer demand, rising operational costs, and higher social security contributions from the Labour government’s autumn budget continue to weigh on sentiment.

Despite wage growth outpacing inflation, household spending remains subdued, reflecting broader uncertainty in the economy. Retailers are also anticipating weaker-than-usual March sales, partly due to Easter falling later this year. Additionally, British businesses are planning to scale back investment at the sharpest pace in over five years, highlighting concerns about fragile demand and elevated costs.

BoE Rate Cuts: Delayed or Necessary?

Complicating the outlook further, the UK’s annual inflation rate accelerated to 3% in January 2025, its highest since March 2024 and exceeding BoE and market expectations of 2.8%. While higher transport costs, food prices, and the 20% VAT on private school fees drove inflation higher, services inflation, which rose to 5%, remained slightly below the BoE’s forecast of 5.2%, signaling some underlying moderation.

This poses a dilemma for the Bank of England, which has been signaling rate cuts to support economic growth. The market is currently pricing in two rate cuts by year-end, with expectations leaning toward a first move by June, or potentially even May. However, if inflation remains sticky, the BoE may be forced to delay rate cuts further, maintaining restrictive monetary policy for longer.

While some policymakers, such as Swati Dhingra, have advocated for an aggressive 50bps cut, others within the BoE remain cautious about easing policy too soon, fearing inflation may remain resilient. Deputy Governor Dave Ramsden recently highlighted "growing uncertainty" around inflation and the labor market, emphasizing the need for a careful, data-driven approach to rate cuts.

Impact of US Tariffs on the UK Market

The direct impact of US tariffs on the UK market is likely to be minimal, as the UK was not included in the latest round of Trump’s trade measures targeting Mexico, Canada, China, and the EU. However, the UK market could still experience indirect effects as the European market reacts negatively to these tariffs.

Equity Market: The FTSE 100 could see increased volatility, particularly if global trade tensions spill over into investor sentiment. While UK stocks may initially avoid direct tariff-related losses, European weakness could drag British equities lower, particularly in industries reliant on global trade.
Fixed Income: Gilt yields fell below 4.5% last week as traders positioned for BoE rate cuts, but a prolonged fight against inflation could reverse this trend, pushing yields higher if the BoE delays easing.
Currency Market: The pound remains in a vulnerable position, especially against the US dollar, as the Fed’s policy path becomes clearer. If the BoE holds off on rate cuts, GBP could see short-term support, but weaker economic data might trigger further depreciation later in the year.

Outlook: Uncertainty Reigns Amid Conflicting Pressures

The UK’s economic landscape is caught between persistently high inflation, weakening retail activity, and global trade risks. While the BoE is expected to cut rates this year, stubborn inflation may force a more cautious approach, delaying easing and prolonging economic stagnation.

At the same time, US tariffs and broader European market reactions could introduce new headwinds for UK equities, making investment conditions more volatile. As a result, investors should remain alert to shifting central bank signals, inflation trends, and geopolitical developments, as all three will play a crucial role in shaping the UK’s economic and market trajectory in the months ahead.

European Markets Face Uncertainty as Germany’s Economic Stagnation and Tariffs Create Headwinds

The Eurozone’s economic landscape remains fragile, as data confirms Germany’s sixth consecutive quarter of contraction, with GDP shrinking 0.2% in Q4 2024, bringing full-year growth to a negative 0.2%. Weak net trade, sluggish household consumption, and a slowdown in government spending have contributed to the downturn, raising questions about how the new government will stimulate growth. Chancellor Friedrich Merz’s CDU/CSU bloc now faces the challenge of forming a coalition, with potential delays in enacting pro-growth policies, including energy cost reductions, infrastructure investment, and easing the debt brake. This political uncertainty, combined with the continued economic downturn, will likely weigh on investor sentiment and limit the region’s growth outlook.

Meanwhile, Germany’s import prices surged 3.1% year-on-year in January, the fastest increase since February 2023, driven by soaring energy costs and consumer goods inflation. With US tariffs on EU imports set to take effect on March 4, Germany’s manufacturing-heavy economy faces increased trade risks, particularly in the auto sector, where Volkswagen, BMW, Mercedes-Benz, and Stellantis already saw significant equity losses last week. Given that Germany is the largest economy in the Eurozone, heightened trade tensions could further dampen investor confidence across European equity markets.

Equity Markets Under Pressure from Stagnation and Trade Risks

European equities have already reacted negatively to Trump’s tariff threats, with both the STOXX 50 and STOXX 600 falling 0.5% on Thursday as concerns mounted over the auto sector’s vulnerability. If tariffs proceed as planned, companies reliant on US exports—especially in Germany and France—will likely see downward pressure on stock valuations. While some sectors, such as consumer goods and pharmaceuticals, may be insulated, the broader market remains at risk of volatility as geopolitical uncertainty escalates.

Meanwhile, inflation data from across the bloc remains mixed. Italy’s inflation rate rose to 1.7% in February, marking its highest level since September 2023, as energy price normalization and base effects from 2022 continue to dissipate. Germany’s inflation held steady at 2.3%, with slower services inflation offset by a sharp rise in food prices, suggesting persistent pricing pressures in certain categories. These figures could complicate the European Central Bank’s policy outlook, particularly if energy-driven inflation accelerates further in the coming months.

Fixed Income and ECB Policy Outlook

The European bond market is also reacting to economic uncertainty, with Germany’s 10-year bond yield holding around 2.46%, as investors assess political developments following the election. The lack of a clear majority in Germany’s new government raises concerns about policy paralysis, particularly regarding potential fiscal stimulus or adjustments to the debt brake. At the same time, Switzerland’s GDP growth slowed to 0.2% in Q4, reinforcing signs of broad economic deceleration across the region.

Looking ahead, investors will focus on the ECB’s January meeting minutes and upcoming inflation data from Germany, France, Italy, and Spain, which could provide further clarity on the central bank’s monetary policy path. While markets have priced in multiple ECB rate cuts this year, the stubborn inflation dynamics and economic stagnation may force policymakers to reassess their approach.

Outlook: Can European Markets Weather Trade and Economic Pressures?

The combination of Germany’s economic weakness, heightened trade risks, and political uncertainty presents significant headwinds for European markets. If Trump’s tariffs are fully implemented, equity markets could see further declines, particularly in export-heavy sectors such as autos, machinery, and industrial goods. Additionally, persistent inflation in key economies like Italy and Germany may limit the ECB’s ability to provide aggressive monetary easing, leaving growth prospects constrained.

For now, investors will be watching how Germany’s new government navigates its economic policy challenges, how the ECB responds to evolving inflation trends, and how European businesses adjust to the trade disruptions ahead. With monetary and fiscal policy uncertainty growing, the outlook for European markets remains cautious at best.

Source: CNBC, Bloomberg, FTnews, TradingEconomics and Reuters.

Market Indicator - 28 Feb 25

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