News concerning both trade policies and equity markets has been more positive recently. However, returning to the levels of the start of the year still seems challenging, and uncertainty has become part of everyday life in the markets.
The stock market has recently seen a recovery following the changes in US trade policy in early April and the subsequent stock market decline. Since the start of the year, both Finland and the rest of Europe have performed strongly on a global level, especially after mid-April.
The first earnings season of the year is well underway, and US companies have reported more good news than bad news on average. A few of the major tech companies, for example, have clearly picked up since the start of the year. Last Friday, the US S&P 500 index rose for the ninth consecutive day, which is the index’s longest upward streak in over twenty years.
In the fixed income market, widened spreads have weighed on returns, but in Europe, the decline in interest rates has compensated for the change in spreads. The recent depreciation of the dollar has also weighed down the returns of USD fixed income investments.
In recent weeks, the main topic in the markets has been the change in trade policy and the tariff saga. After the USA announced the postponement of the biggest tariffs, the news flow regarding trade policy can be interpreted as mostly positive, including announcements of tariff exemptions for certain product groups. Although the country’s current administration has been steadfast in many of its decisions, the general thinking is that the tariffs will probably be reduced from their current level.
In spite of this thinking, there is – as with almost everything at the moment – significant uncertainty associated with the tariffs, something that was not seen even in president Donald Trump’s first term. At present, however, it seems unlikely that the tariffs would fall to the levels they were at before the current administration’s new trade policy decisions, even if the tariffs were to change in a positive direction.
As a result of the changes in trade policy, both the credibility of the US political leadership and the country’s role in global financial markets have changed. These factors are expected to have potential negative impacts on GDP growth in the USA.
The impacts have not yet been significantly reflected in economic data, but soft data, such as various surveys, show that uncertainty about the economic outlook has increased significantly.
The employment data released last week was still positive, but the challenge is that it is no longer an accurate metric of the new reality. For example, shipping traffic from China to the United States has already decreased by about a third. It is expected that the prices of some imported goods in the USA will increase and some goods may disappear completely. If realised, these will have knock-on effects in the United States that could rapidly lead to layoffs. It is now important to monitor how various economic indicators in the USA will develop going forward.
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