The uncertainty surrounding the evolution of US trade policy remains high and is likely to continue to feed market volatility ahead.
Markets were volatile in April, as the implications of US trade policy impacted stocks, bonds, and currencies. The month started with President Trump’s announcement of a set of tariffs that were broader and more punitive than expected. Equity markets sold off just after the announcement and the VIX measure of implied market volatility spiked to 60, the highest level since the pandemic.
Stocks recovered much of their losses after President Trump softened the approach, announcing a 90-day pause in the implementation of reciprocal tariffs for countries that had not yet adopted retaliatory measures, and the removal of tariffs on a range of electronic products. US / China trade tensions also eased somewhat after the US administration softened its tone.
Developed equities ended the month up 0.9% with US markets underperforming most of their global peers. Growth stocks outperformed their value counterparts, with the poor performance of the energy sector a particular drag on the value index. Emerging markets were relatively resilient, supported by solid returns from Mexico and Brazil in particular.
The confidence shock triggered by the “Liberation Day” tariff announcements also affected the bond markets. The yield on 10-year US Treasuries reached a peak of 4.6% on 11 April, before settling at 4.2% by the end of the month. A fall in euro government bond yields contributed positively to the return of the global aggregate bond index. A stronger yen and euro versus the US dollar also helped to lift global bonds into positive territory in US dollar terms.
Gold was the big beneficiary of April’s uncertainty, marking a new all-time high at $3,500 on 22 April. Commodities shed some of their year-to-date gains as metals weakened and oil prices fell by 16% amid rising recession fears and a decision from OPEC members to boost supply.
Fixed income review
The US bond market experienced significant intra-month volatility. The sharp spike in Treasury yields was likely driven by a combination of structural and cyclical drivers, as we explain in our recent On the Minds of Investors publication.
US headline and core inflation rates for March declined, printing below expectations at 2.4% and 2.8% year over year respectively. Despite the likelihood of inflation reaccelerating over the next few months, markets are pricing in four US rate cuts by the end of the year.
In the eurozone, the European Central Bank cut rates by 25 basis points, bringing the deposit rate to 2.25%. The monetary policy statement viewed the disinflationary process as "well on track" and noted that the "outlook for growth has deteriorated owing to rising trade tensions." Increasing confidence about the prospect of lower interest rates ahead provided support for European government bond markets over the month.
In the United Kingdom, government bond yields were very volatile over the course of April but ultimately ended the month lower. An encouraging decline in March inflation, coupled with weaker activity data, is likely paving the way for the next Bank of England rate cut in May.
Credit spreads fluctuated with risk sentiment in April, selling off sharply on the back of the tariff announcements before later retracing much of the move. Higher quality credit markets continue to demonstrate relative resilience in the face of recession risks, likely thanks to the significant improvements in debt levels that many companies have pursued in recent years.
Equity and macro review
US data released in April showed signs of economic moderation. The flash composite Purchasing Managers' Index (PMI) fell to 51.2, with the decline driven by the services sector, which registered at 51.4. The manufacturing index rose slightly to 50.7. Meanwhile, business expectations and the Michigan consumer sentiment index fell to levels last seen during the pandemic. A shock to confidence is hindering investment and spending decisions, increasing the risk of a recession by the end of the year.
The S&P 500 Index underperformed many global peers, closing at -0.7%. The energy and healthcare sectors were the most notable laggards.
In the eurozone, the flash composite PMI fell to 50.1 in April, driven by a decline in the services index (49.7), while the manufacturing PMI remained relatively unchanged at 48.7, despite the US implementing a 10% tariff (and 25% on autos) in early April. The manufacturing PMI was supported by lower energy prices and expectations for fiscal stimulus, which helped to offset the trade-related headwinds. The eurozone consumer confidence index also dropped, confirming that trade tensions and the unresolved conflict in Ukraine are weighing on economic sentiment.
The European Union decided to suspend retaliatory tariffs on steel and aluminium in an effort to create the conditions for negotiations with the US administration. This decision, coupled with political agreement in Germany to form a new government, provided partial relief, but the European equity market still fell by 0.4% over the month.
In the UK, April’s flash PMIs showed a deterioration in economic momentum. The composite index moved into contractionary territory (48.2), with both global and domestic headwinds arising from a combination of trade uncertainty and higher domestic taxes. The UK equity market fell by 0.2% over the month.
In Japan, the all-industry flash PMI rose to 51.1, thanks to a partial rebound in the services sector. However, the manufacturing index remained in contractionary territory, confirming risks related to the expected negative impact of US tariffs on export-oriented Japanese companies. Having fallen sharply earlier in the year, Japanese stocks were a relative outperformer in April, delivering a positive return of 0.3%.
In the first part of the month, US tariffs on Chinese goods soared to an eye watering 145%, with tit-for-tat retaliation from China. Later in April, the US administration’s willingness to negotiate helped to ease tensions, which, combined with a solid first quarter GDP print of 5.4% year over year, helped to drive a rebound in Chinese stocks.
Despite the rapid escalation in US / China tensions, emerging markets were resilient compared to developed markets. Countries such as Mexico and Brazil were relative outperformers, helped by the relatively less punitive tariff approach announced by the US administration.
The uncertainty surrounding the evolution of US trade policy remains high and is likely to continue to feed market volatility ahead. In this environment, regional diversification in equity markets can help to mitigate some of the risks stemming from US policy. Core government bonds were volatile in April, but we still see high-quality fixed income as an effective hedge against recession risks over a 12-month horizon. With price pressures still lingering, it’s also important to not overlook the role that alternatives can play in protecting against inflation risks.