— Che Guevara
“The revolution is not an apple that falls when it is ripe.”
March was another volatile month for financial markets as investors grappled with uncertainty in US trade policy and around negotiations to end the Russo-Ukrainian war, and digested mixed economic data. Sentiment was broadly negative—US equities suffered in particular as market chatter about a possible US recession rose to a crescendo mid-month. But European stocks proved comparatively resilient as the German parliament agreed major infrastructure and defence spending and to relax fiscal restrictions ; and some formerly out-of-favour emerging markets, most notably China, held their ground or even rose during the month. Meanwhile, there was a rally in precious metals like gold (helped by a weaker dollar): gold climbed above $3000/oz for the first time, reaching a high of $3123 at month-end. This helped our portfolios.
Among equity styles, ‘growth’ (particularly the technology sector) again underperformed ‘value’ in March despite falling US Treasury yields . In these newsletters, we have often spoken of the risk that rich valuations of Big Tech stocks—driven by optimistic assessments of highly speculative future earnings—suddenly and brutally correct. That may now be happening. Among the Magnificent Seven, Amazon (-13.3% YTD as of the end of March), Apple (-8.9%), Microsoft (-10.8%), Alphabet (-18.2%), NVIDIA (-19.3%), and Tesla (-35.8%) have all corrected very sharply this year). This compares to -4.6% for the S&P 500 Index—of which these stocks represent a large part. That said, many of the mega-cap tech companies are leaders in developing and deploying AI, and divesting from them fully would be madness given that technology’s revolutionary value-creation potential. Diversification is the solution.
“We have often spoken of the risk that rich valuations of Big Tech stocks—driven by optimistic assessments of highly speculative future earnings—suddenly and brutally correct. That may now be happening.”
Without doubt the biggest contributor to March’s market turbulence was President Trump’s forceful, ongoing revision of trade policy. During the month he implemented—or threatened to implement—new, high tariffs on most of America’s largest trading partners. In addition, constant modifications to these new tariffs (sometimes days before/after implementation) have created considerable uncertainty as to their duration, scope, and scale for businesses trying to adapt. On 4th of March, the Trump Administration increased existing tariffs on China from 10% to 20% and levied a 25% tariff on goods from Canada and Mexico (for those goods not compliant with rule-of-origin provisions of the US-Mexico-Canada Agreement and excluding energy goods, for which a 10% tariff was implemented).
“Without doubt the biggest contributor to March’s market turbulence was President Trump’s forceful, ongoing revision of trade policy. During the month he implemented—or threatened to implement—new, high tariffs on most of America’s largest trading partners.”
Looking to the immediate future, President Trump has further announced that a 25% tariff will be levied on autos and auto parts, effective 2nd of April, and that ‘reciprocal’ tariffs on ‘all countries’ will come into effect on the same day. Automobiles are one good in which the US has a very large trade deficit, so the impact of the auto tariffs alone will be meaningful. But the wider tariffs are causing the greatest concern among investors—and prompted the most recent bout of selling. What this policy likely means (although the details remain unconfirmed) is that US tariffs will rise to a level that is (at least) equivalent to that of each other country’s tariffs on US imports; and should these other countries retaliate with tariffs, US tariffs will automatically rise to offset them. A spiral of tariff hikes could therefore take place in the coming weeks and significantly depress global economic activity.
“A spiral of tariff hikes could therefore take place in the coming weeks and significantly depress global economic activity.”
Lastly on trade, the President also announced so-called secondary tariffs on countries that buy oil or gas from Venezuela, effective 2nd of April, and has threatened to do the same to countries that buy oil or gas from Russia if President Putin does not show greater readiness to sign an immediate ceasefire with Ukraine. Such a levy on Russian oil and gas would severely impact India and China (and Russia, of course) and exacerbate global inflationary pressures and slow growth—much like the rest of the Trump trade revolution.
One surprising beneficiary of Trump’s tariff onslaught has been Mark Carney. On the 14th of March, the former Bank of England and Bank of Canada governor was elected leader of the Liberal Party, and thus Prime Minister of Canada, following the resignation of Justin Trudeau. And he has since successfully exploited resentment towards President Trump’s trade and annexation threats to boost his party’s chances of victory ahead of snap elections at the end of April. Indeed, the Liberals have now leapfrogged the Tories—who had previously led the opinion polls by a wide margin—and have become favourites to win.
Another Trump campaign promise was to end the war in Ukraine as quickly as possible—even if peace can only be achieved now on broadly Russian terms—and to ensure that European NATO states carry more of the burden for European security in future. He has ruthlessly pursued both of these goals since his inauguration; and March proved to be a pivotal month for Ukraine. It began badly, with a disastrous public spat between President Trump and President Zelensky over the nature and extent of US security guarantees connected to a proposed minerals deal—and Zelensky’s gratitude, or otherwise, for support to date—after which the US temporarily halted military aid to Ukraine and intelligence sharing. But after Ukraine agreed a 30-day ceasefire without preconditions and to continue negotiations with the US over mineral rights, America reverted to its former level of support for Ukraine’s war effort. The minerals deal has still not been signed due to “constantly” changing terms and conditions—more favourable to the US than those in the original draft—but we expect it to be finalised soon.
Meanwhile, the US has turned its diplomatic attention to Russia, holding direct bilateral talks in Saudi Arabia. President Putin has claimed that he wants to end the war. But there has been little reduction in the intensity of the conflict, only a ‘ceasefire at sea’ that is broadly in Russia’s interest and an agreement (so far largely unobserved) not to strike energy infrastructure in either Russia or Ukraine. In addition, the Kremlin has stated that ending the war will be “a drawn-out process” and it has outlined preconditions for a ceasefire and talks with Ukraine that would take months or years to implement. This has irked President Trump, who is threatening secondary tariffs on Russian oil and gas (as described above) unless Russia agrees to an immediate unconditional ceasefire of the kind proposed by the US and agreed to by Ukraine soon. This ultimatum is likely to be ignored—Putin has instead ordered the largest conscription drive since the war started. Against this unstable backdrop, it is no surprise that gold is rising…
“Putin has instead ordered the largest conscription drive since the war started. Against this unstable backdrop, it is no surprise that gold is rising…”
US data released in March painted a mixed picture of the economy, with some areas of continued resilience and others of emerging weakness. Collectively they underscored a tepid outlook with plenty of downside risks associated with US trade policy. Price growth was shown to have continued to fall in February—headline inflation came in at +2.8% YoY, while core stood at +3.1% YoY (both below market expectations)—but investors nonetheless revised up their forecast for inflation for the year ahead, given the tariff backdrop, as 1-year inflation swaps hit a two-year high in March. And while unemployment was stable at 4.4%, consumer confidence collapsed to a four-year low. So far at least, fears of an immediate US recession were not confirmed in March but the economy has certainly lost some momentum under Trump—and inflation risks are skewed to the upside. This is the view of the Fed, too, which forecast slower but still positive GDP growth of +1.7% for 2025, alongside higher core inflation. This led them to hold rates at 4.5% when they met mid-month and to slow QT (which helped markets to briefly recover).
“Investors nonetheless revised up their forecast for inflation for the year ahead, given the tariff backdrop, as 1-year inflation swaps hit a two-year high.”
On the other side of the Atlantic, economic growth remains slow and fragile, while inflation fell to just +2.3% YoY in the latest release, increasing expectations for ECB rate cuts. But, crucially for the European economy, the parties likely to form the new German government agreed to relax the so-called debt brake and implement a historic EUR 500bn fiscal package aimed at upgrading the German military and crumbling infrastructure. This agreement was reached faster than many investors expected and the immediate result was a significant rise in bond yields—the 10-year German bund saw its biggest daily rise since German reunification. Other than increasing European bond yields, this fiscal stimulus is also expected to boost European growth.
Despite the unstable backdrop, one traditional safe haven failed to rally in March: the US dollar. Indeed, the DXY index (which reflects the dollar’s value versus a basket of other major currencies) has fallen markedly since President Trump’s inauguration—most of all in March (-3.2%). A loss of confidence in US economic exceptionalism in the face of high US tariffs and fiscal expansion in Europe is one reason for the dollar’s slide. But another is simply the view that President Trump wants a weaker the dollar to boost US export competitiveness (so long as this does not jeopardise the dollar’s survival as the global reserve currency).
Early in March there was even talk of a ‘Mar-a-Lago Accord’: a proposal that the US could use the leverage it derives from its deep economic and security relationships to force foreign holders of dollars to accept lower rates on their bond holdings and to coordinate the forcible devaluation of USD. There are many obstacles to such an ambitious policy—not least that bondholders like China are unlikely to get on board—so we see a Mar-a-Lago Accord as unlikely. But the fact that such ideas have purchase today points to a more circumspect outlook for the dollar than we have seen in many years. For now, we doubt that the dollar will fall from its present pre-eminence: there are no viable alternatives to the mighty USD—unless you believe that the US itself has hedged its bets with having established a bitcoin-boosting strategic crypto reserve in March! But we remain alert to any relevant policy shifts.
“For now, we doubt that the dollar will fall from its present pre-eminence: there are no viable alternatives to the mighty USD—unless you believe that the US itself has hedged its bets with having established a bitcoin-boosting strategic crypto reserve.”
If you have any questions about the themes discussed in this article, please do not hesitate to get in contact with us: info@bedrockgroup.ch
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