Markets respond badly to ‘Liberation Day’
‘Liberation Day’ saw President Donald Trump unleash sweeping tariffs across the globe. In addition to a 10% baseline tariff affecting most countries, President Trump announced additional “reciprocal” tariffs for many countries. The tariffs imposed have increased the average tariff rate in the US to 22% up from 2.5% in 2024. Following the announcement, the World Trade Organisation revised down its forecast for global trade from 3% growth to a 1% decline for 2025.
Crucially for UK investors the UK will only face the 10% baseline tariff, which is the lowest tariff announced. This puts the UK in a better position compared to other countries like Canada and Mexico, which face tariffs over 30%, and China, which faces tariffs above 50%.
US Equity Market:
Across the board, markets initial reactions to the tariffs have been negative, with global equity markets dropping sharply. The S&P 500 and NASDAQ closed the week down 9.0% and 9.7%, respectively. Notably, the S&P 500’s 4.8% decline on Thursday was its biggest daily decline since June 2020.
The volatility caused by President Trump’s tariff policies has led to the worst quarter for US equities since 2022. Heightened volatility has resulted in the S&P 500 and NASDAQ indices experiencing losses of 4.6% and 10.4% respectively over the quarter ending 31st March.
UK Equity Market:
The UK market has been more resilient to the tariff announcements, with the UK Large-Cap index closing the week down 6.9%. As these big movements occurred post-quarter end, this index experienced a strong start to the year, growing 5.0% over the quarter ending 31st March. The UK Large-Cap index has been one of the strongest performing stock markets so far in 2025.
There were significant moves in currency markets after the announcements with sterling rallying against the dollar and now trading around 1.29 against the US dollar.
Inflation, Interest Rates and Bond Markets:
The impact of Trump’s tariffs has also begun to feed through to credit markets, with the credit spread on US denominated high yield bonds widening considerably. High yield bonds are lower quality bonds, and the credit spread associated with a bond widens when investors require a higher yield in order to take on the risk of holding the bond.
As is often the case when market volatility increases, investors have made significant moves towards Government Bonds which are considered to be safe haven investments during periods of stress. This has driven up the prices of US and UK Government bonds and subsequently driven down the yields investors receive for holding these bonds.
Eurozone inflation for March came in at 2.2%, in line with expectations. This is lower than February’s estimate of 2.3% and marks consecutive monthly drops in Eurozone inflation. This is positive news for investors and the European Central Bank (ECB), as cooling inflation increases the chances of the ECB cutting rates again later this month.
What’s on the horizon:
Unsurprisingly, the ongoing developments in President Trump’s trade war will be at the centre of financial press. China has already announced retaliatory tariffs and investors are waiting to see whether other countries will follow suit.
On Friday, the monthly UK GDP estimate for February will be released. This will be closely watched by investors and Chancellor Rachel Reeves, as the UK growth problem continues to be a headwind for the economy.
You can read our March asset returns review here: March review