Tariffs, Ukraine and Oil dominate

The March rally did not last long. US stocks tanked late on Monday, and European stocks have opened lower on Tuesday after a troika of events knocked market sentiment. The US imposed 25% tariffs on Canada and Mexico starting from today, it also imposed another 10% on China. The oil price has tumbled sharply as OPEC+ confirmed that it would go ahead with increasing supply by 138,000 barrel per day, which further adds to concerns about over supply. Brent crude has fallen nearly $3 a barrel on the back of this news, and is hovering just above $70 per barrel, while WTI is below this key support zone. The US also confirmed that it would suspend all military aid to Ukraine. The question now is, how long will any sell off last, and will there be pockets of strength?

Chinese shares take tariffs in their stride

After initially falling sharply, Chinese shares are now mostly flat, as the market targets sectors that are most exposed to the tariffs, rather than selling the blanket index. For example, the Hang Seng has clawed back losses and is now close to flat on the day. Indices in Europe are broadly lower on Tuesday. Autos are leading the decliners, which is weighing on the Dax, and it is one of the weaker performers in Europe so far. Once again, the UK’s FTSE 100 is one of the most resilient indices in Europe, partly because of its defensive make up, and partly because the UK, so far, remains tariff free. However, the energy sector is one of the weakest links for the FTSE 100, as oil prices tumble to their lowest levels since December. Unsurprisingly, Shell is one of the biggest decliners on the FTSE 100 today, while miners are also lagging, including Rio Tinto and Anglo American. This is not a day for stocks that are leveraged to the global economy, including miners and materials sectors. Instead, healthcare stocks and defence firms are leading the UK index.

Trump super charges tariffs back to levels not seen for nearly 100 years

Looking at tariffs first. These are the largest US tariffs since the 1930s. There is already tit for tat retaliation from China and Canada, and we expect the same from Mexico. China immediately placed tariffs of 10-15% on US agricultural products and on some US companies. It will be interesting to see how these retaliatory tariffs go down in Trump’s home turf, and whether he sees a shift in support on the back of this. If he does, will this force him to change his stance? Tariffs did not do much to help the global economy or geopolitics 100 years ago. Trump, who professes to hate war, should remember the lessons that history teach us.

Will tariffs stay for the long term?

However, with Trump, nothing can be ruled out. While he is aggressively implementing his agenda for now, this may not last and at this stage we do not know how long tariffs will remain in place.  We do know that once implemented, tariffs can be hard to reverse, which is why a Global trade war remains one of the biggest drags on growth, inflation and overall sentiment as we move towards the last few weeks of Q1. The fact that President Trump has gone ahead with high levels of broad-based tariffs, suggests that next month’s reciprocal tariffs will also be harsh, which may limit European stock market upside in the coming weeks. Interestingly, the US has been the biggest loser from tariffs so far.

US abandons Ukraine, as Europe steps in

One of the biggest stock market winners so far, are defence stocks. The Goldman Sachs European defence index has reached another record high on Tuesday. As the US leaves Ukraine out in the cold, Europe is left scrambling to ensure Ukraine is protected. This is good news for Europe’s biggest defence names, as the prospect of Europe’s security needs have surged in the last couple of weeks. President Trump has stepped up his rhetoric against Ukraine in the last 24 hours and has also castigated Europe for using the US as a security blanket. This argument is being met by some big moves in Europe: the bloc is proposing EUR 150bn in loans for pan European defence projects. Does this mean that Trump can drop the tough guy act with Zelensky now? Even if he does moderate his rhetoric, we see defence as a major theme for European stock in the short to medium term.

Gold glitters amongst the uncertainty

The market has to reprice these tariff risks now that they have become reality. Markets may remain jittery for the next few days as we wait for the US payrolls report on Friday. From a stock market perspective, healthcare and materials could outperform consumer stocks and tech. This environment is also good for gold, as growth slows, uncertainty surges and inflation fears remain. The gold price is higher by another $20 today and is closing in on the $3000 an ounce level. We could see further record highs in gold in the coming weeks. We mentioned yesterday that March is a key month for financial markets that could determine the direction of financial markets for months to come. It has certainly been an explosive start to the month.

Are bears taking over?

There has been a notable shift in the market narrative recently. This has overshadowed some solid earnings for last quarter, the S&P 500 reported 17.8% growth in earnings for Q4 2024, the highest level since Q4 2021, and 77% of companies beat their EPS estimates. However, the narrative is dominated by fears about stagflation and mass US government job losses, along with geopolitical risks. Even if DOGE does cause job losses in the US, the recent reduction in immigration means that the private sector could absorb any public sector workers, which may be reflected in this Friday’s NFP report.

There are a lot of negative headlines out there, but are they out of step with reality? US growth is undoubtedly slowing, but 2024 was the 5th year of above average growth in the US. A slowdown is to be expected, and it may not be as bad as everyone is worried about. Sustained below trend GDP is needed for a sharp contraction in equities, and this may need an external driver. For now, that looks less likely, expectations of future rate cuts and plentiful market liquidity could protect markets. Added to this corporate balance sheets are strong, especially in the US, which could mean that the engine of global growth is not in as bad shape as some expect. The headlines are bad, the real economy may not be.

This environment does support consolidation in equity markets, including the US and Europe. Equities have taken out the Trump bump, but have not reacted, as yet, to the ‘panic’ in the news. Bond yields have also been pricing in a shift in growth prospects, but with the 10-year US Treasury yield above 4%, there is no panic on bond pricing yet. Sometimes, we need to listen to the markets, things are bad, but maybe not that bad.