Equity markets faced a challenging and volatile month, driven by the uncertainty surrounding U.S. trade policies, the absence of the so-called “Trump put”, and growing recessionary fears, all of which contributed to the risk-off sentiment. This pushed the VIX to 27.9 (the 89th percentile) and led the S&P 500 to its first 10% correction in nearly two years. As markets waited hopefully for some clarity on the April reciprocal tariff announcement, the MSCI World index already declined 5.0% over March, while the MSCI Emerging Market was flat at 0.3%, and the Bloomberg Global Aggregate index returned 0.6%, all in local currency total return terms.

Trade policies have sent shockwaves around the globe. In the U.S., a series of announced tariff increases have weighed on households’ sentiment and raised consumer inflation expectations, and the University of Michigan’s consumer sentiment index has declined for three consecutive months. The Federal Reserve’s (Fed’s) preferred inflation gauge, the core personal consumption expenditure (PCE) index, came in firmer than expected, adding to concerns over the risk of reflation in the U.S. However, the March Fed meeting offered some dovish signals as Chair Jerome Powell suggested that the impact of tariffs may be transitory. By describing the current policy stance as “well positioned” and reiterating significant “uncertainty” in the U.S. economy, the Fed appears prepared to adopt a more accommodative monetary policy should labour condition falters, albeit still in a reactive manner. Consequently, market expectations have shifted towards anticipating three rate cuts for the remainder of the year, with treasury yield curves steepening to levels not seen in nearly three years.

The announcement of auto tariffs and rumours of a broader-than-anticipated reciprocal tariff in late March triggered a sharp sell-off across European markets and parts of Asia. While the external outlook remains gloomy, domestic developments have been generally more encouraging. In Europe, Germany’s approval to reform the constitutional debt break and increase fiscal spending on defense has revived domestic sentiment and been well-received by markets. Comments from the European Central Bank also shifted its focus towards growth risk over inflation, signaling a willingness to consider more rate cuts amidst mounting external uncertainty. In Asia, China’s new consumption plan and its higher fiscal deficit ratio target, announced at the National People’s Congress, provide tailwinds for domestic growth. Meanwhile, Japan’s latest results from its Shunto negotiations have shown promising progress in advancing its virtuous wage-price cycle.

As governments, central banks, households, businesses and markets assess the global impact of U.S. trade policy, it is important to not overlook the positive domestic macroeconomic developments occurring in various regions worldwide. While the imposition of tariffs pose significant challenges to the global economy, the economies that can effectively pivot towards internal growth drivers are likely to outperform broader markets.

Australian economy:

• The FY2026 Commonwealth Budget revealed new tax cuts, lowering the tax rate for the Australian dollar (AUD) 15-45k income group from 16% to 14% over the next two fiscal years. Other subsidies on energy and Medicare were also announced. Under the new projections, these policy decisions are expected to add an AUD 35billion deficit over the next five years, but this will be offset by stronger corporate tax receipts, lower welfare costs and other non-policy variations, which are estimated to add AUD 36billion to the underlying cash balance. The fiscal deficit is projected at 1.5% for the coming fiscal year and is expected to track between 1.1%-1.2% for the following three years.
• The 4Q gross domestic product (GDP) grew 0.6% quarter-on-quarter (q/q), driven by a rebound in household consumption and resilient public demand, lifting 2024 full year growth to 1.3%.
  (GTM AUS page 4)
• The monthly consumer price index (CPI) slowed to 2.4% year-over-year (y/y) in February, below consensus estimates. Electricity prices led the decline following the third installment of the subsidy payments. Trimmed mean inflation rate, at 2.7% y/y, remains well within the central bank’s 2-3% target band.
  (GTM AUS page 5)
• Unemployment rate was unchanged at 4.1% in February, with the 53k decline in total employment offset by a lower labour force, as fewer older workers returned to work in the new year. Participation rate fell to 67.2%.
  (GTM AUS page 9)
• Retail sales rose 0.3% month-over-month (m/m) in January, largely driven by catering and hospitality sales due to large-scale sporting events during the month, while most other categories were flat or declined.
• Consumer sentiment improved, with the index rising to 95.9 in March. The increase was broad-based, lifted by slowing inflation and rate cuts, though overseas news has been more unsettling.
• Housing prices increased 0.4% m/m in March, as the rate cut lifted borrowing capacity and mortgage serviceability, and thus sentiment.
  (GTM AUS page 10)

Equities:

• The ASX 200 fell 3.4% in March. Despite recovering some loses mid-month due to soft employment and inflation data, which added hopes for a May cut, it was not enough to offset the drag from U.S. tariff headlines. Nearly all sectors declined over the month, with Technology (-9.7%) down the most and only Utilities (1.5%) above water.
• The MSCI AC World continued its decline in March, falling by 4.4%. Developed markets underperformed with a -5.0% return, dragged by the U.S. MSCI Europe also gave back earlier gains, falling -3.5%.
  (GTM AUS page 37)
• Emerging markets outperformed developed markets in March, returning 0.3% in local currency terms. Japan outperformed for most of March, mainly buoyed by stronger-than-expected inflation data and the expectations of rate hikes by the Bank of Japan. However, Japanese markets tanked when U.S. auto tariffs were announced, putting the MSCI Japan monthly return at 0.2%.
• Equity valuations declined over the month, with the ASX 200 reaching 17.5x forward price-to-earnings (P/E) ratio and the S&P 500 at 20.1x, while the MSCI Europe (14.0x) and MSCI Japan (13.9x) continue to screen relatively cheaper. (GTM AUS page 38)

Fixed income:

• 10-year yields on Australian government bonds rose 9 basis points (bps) in March to 4.39%. U.S. 10-year Treasury yields also rose 2 bps to 4.21%, with the yield curve reaching its steepest level in three years, as markets continued to digest the on-and-off tariff threats and firmer inflation data, while the Fed views inflation risk as transitory and focuses more attention on growth concerns. The duration on Australian yields relative to the U.S. remains attractive.
• The Japanese government bond 10-year yield rose to 1.52%, a decade high level, due to promising developments at the Shunto wage negotiations.
• Spreads stayed tight on U.S. investment grade bonds but widened on global high yield bonds, which returned -0.9% over the month, as all-in yields rose.
  (GTM AUS page 51)

Other assets:

• Commodities were broadly higher in March. Gold prices surpassed USD 3000 per ounce on March 14, driven by policy and economic uncertainties that increased demand for safe-haven assets, ending the month 9.9% higher. Brent crude was 2.7% higher, impacted by factors such as energy tariffs on Canada and Mexico, as well as the Organization of the Petroleum Exporting Countries’ (OPEC+’s) decision to increase output.
  (GTM AUS page 62, 65)
• The USD dropped sharply in early March and the DXY index ended the month down 3.2%. The euro surged on Germany’s agreement to increase defense and infrastructure spending, rising 3.9% over March.
  (GTM AUS page 67)

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