Week ahead: ‘Liberation Day’ arrives

With one trading day left of the quarter, risk sentiment has drained from Asian and European stock markets. The Nikkei closed down 4%, while European indices are a sea of red. The sell off is broad based, with more than 550 of the Eurostoxx 600 stocks lower as investors take fright ahead of President Trump’s tarrif announcement that is due on Wednesday. The flight to safe havens has sent the gold price higher by $36 per ounce, and gold is now above $3,122 per ounce. ‘Liberation Day’ for America is bad news for global stocks, and US futures are also pointing to a sharp decline for the S&P 500 later today.

The first three months of the year have been a roller coaster. Financial markets have been roiled by the implementation of President Trump’s tariff programme. European stocks had a fantastic start to the year, YTD, the Eurostoxx 50 is higher by nearly 9%, the Dax if up by 12% and the FTSE 100 is higher by nearly 6%. This compared with a 5% drop for the S&P 500 and a 10% slump for the Nasdaq, which is now in correction territory. The past month has see a further sell off in US stocks and European stocks also came under selling pressure. European stocks lost upward momentum in recent weeks. They  have been weighed down by the luxury sector and car companies, which are all targeted by the White House. Even the Dax, which was leading European stocks higher this year, stalled in March. German auto makers, materials companies and consumer companies weighed on the Dax in March and the index fell 0.4%.

The sell off in the S&P 500 so far this year has been led by Tesla and big tech, however, in recent weeks the US blue chip index’s sell off has gathered pace and has broadened to sectors that are exposed to the consumer. Some of the worst performing stocks on the S&P 500 in the past month are linked to fears about consumers reigning in their spending: Delta Airlines is lower by 27%, United Airlines is down by 25%, Ralph Lauren is lower by 20% and Lululemon is lower by 19%. The decline in consumer stocks is worth noting, it suggests that investors see US consumers bearing the brunt of the pain from tariffs, which could be counter productive for President Trump.

The question now is, have US stocks, and consumer stocks in particular, absorbed enough pain in the run up to the reciprocal tariff  announcement? To answer this, we can look to the options market: more volatility is expected, however, investors are more concerned about volatility from this week’s payrolls report rather than Wednesday’s tariff news? March has been a pivotal month for financial markets, all eyes are on April, and whether it will bring an opportunity for recovery.

Below, we look at three events that will drive financial markets this week.

Trump’s ultimate tariff plan becomes reality

The second quarter will start with a bang on April 2nd when the Trump administration is expected to announce reciprocal tariffs. President Trump has flip-flopped on whether he will be lenient or take a tougher approach to countries that run a trade surplus with the US. The Trump administration has touted these tariffs as a way for the US to claw back revenues and jobs that have been lost to opportunist governments overseas, however, there is a good chance that the US will shoot themselves, and the rest of the global economy, in the foot with these tariffs, at least in the short term.

Analysts expect tariffs to boost US inflation by more than 1% this year, which could complicate the Federal Reserve’s monetary policy loosening cycle. It will also hit US GDP, with real GDP expected to fall by 0.8% this year as a direct result of the tariffs. The dollar has sunk so far in 2025, and instead of acting as a haven in a period of geopolitical turmoil, there is a sign that FX investors are turning their back on the greenback. The USD is the weakest performer in the G10 FX space so far this year, the Canadian dollar has managed to eke out a gain vs, the USD, even though Canada has already been hit by US tariffs. The harbour in the storm for FX traders during this period may surprise some: the Russian ruble is the best performing currency out of the expanded majors so far in 2025, and the second-best performer in March behind the Norwegian krona. Russia is also in the firing line for tariffs and President Trump threatened secondary tariffs on Russian oil exports this weekend if Russia does not reach a ceasefire with Ukraine. Is the FX market being too complacent about US tariffs? We think not, instead, we think that the FX market is looking at President Trump’s actions and taking the view that he is making the US smaller and less important in the global economy. By weakening his own consumers and expecting US businesses to re-shore manufacturing jobs in an era of high wage growth, the FX market is taking a dim view of President Trump’s economic policy.

Analysts remain optimistic on the S&P 500 and tech

This does not mean that tariffs are not a major theme for financial markets this week. As we said above, we need to see if it will be ‘sell the rumour, buy the fact’ for US stocks. Once we get the details of the reciprocal tariffs: who will be affected and what the tariff rates will be, then the focus may shift to Q1 earnings season? It is worth noting that industry analysts are still expecting a large increase in the S&P 500 over the next year. On aggregate, analysts are expecting a 21% gain the S&P 500, according to FactSet. Tech, consumer discretionary and communication services are expected to see the largest gains, while financials and energy are expected to see the smallest gains. Even as US stocks have fallen so far this year, expectations for the S&P 500’s price target has been revised lower by a mere 0.5%. The upcoming Q1 earnings season will be crucial to determine whether analysts are right to be optimistic, and future guidance will be scrutinized to find out about the impact of tariffs.

The biggest risk that comes from tariffs is duration. If the tariffs remain in place for longer than a year, then global stocks could have further to fall. The US’s effective tariff rate has surged already this year to 8% from 2% before Trump took office. The reciprocal tariff announcement this week is expected to push this burden to 10% or more, with the potential for more to come. Anything above 15% could sink US GDP by more than 1%, which is bad news for stocks, and the global economy. The worst-case scenario is bad for US stocks, the question is, will we get there?

The tariff trade has centered on short US stocks, short the dollar, long US bonds and long gold. We do not think that this will change in the short term. However, if we see stocks pick up after Trump has announced his tariff plan later this week, then watch out for a recovery in the USD and weakness in gold and US bonds. The gold price reached a fresh record on Monday and surged through the $3,100 level. Unless Trump’s bark is worse than his bite, the gold price may continue to move higher. The gold price could take a knock if Trump hints at exemptions to his reciprocal tariff plan, or if he signals a U-turn is likely. We would also expect a recovery rally in risky assets if tariffs are delayed, although we think that there is a low chance of this happening at this stage.

US payrolls

Once the market gets over the hurdle of the reciprocal tariff announcement on Wednesday, the focus will be on US labour market data on Friday. The market is expecting no major surprises from the March report, with 138k non-farm jobs expected to be created, the unemployment rate is expected to remain stable at 4.1%, and average hourly earnings are expected to have grown by 4% YoY, within the long-term range.

However, some analysts are expecting a large upside surprise to the March payrolls number. This is down to a rebound in jobs growth after storms and fires distorted the January and February jobs figures, front running of tariffs and some reversals of government grant freezes that may have boosted US jobs growth last month.  Although DOGE job losses are expected to weigh on jobs growth later this year, we think that Elon Musk’s efforts to cut government spending and reduce the Federal workforce will take longer to filter through to the data. Added to this, some of DOGE’s department cuts have been rescinded by the courts. The Federal government is a relatively small employer compared to local and state governments. Thus, even if Federal worker numbers fall in March, overall government jobs could still rise as long as state governments continue to hire workers.

The market reaction to the US labour market report has been fairly muted in recent months, due to the distortions to the data caused by weather events. The average response in the last 12 months in the 30-minutes after the payrolls report has been released is mildly positive for the S&P 500. The biggest positive move after a payrolls report was for the February 2025 report and the October report 2024. The S&P 500 rose by 0.4% on both occasions, 30 minutes after payrolls were released.

The largest move to the downside came after the July report was released in early August, which saw a large negative surprise and spurred a larger sell off in risk assets in the following days and weeks. The moves in the dollar have been negligible after payroll reports in recent months. This suggests that other factors are driving the dollar right now, for example Trump’s tariff talks and concerns about US trade relations, rather than US economic data.

European CPI

The euro has stabilized at the start of this week, and EUR/USD is hovering just below $1.0830 at the time of writing. There is a general air of jitteriness in equity markets as we lead up to the tariff announcement that could hit the EU hard, although this is not triggering a selloff in the euro at the start of this week. CPI could be a bigger driver of the euro in the next few days. The market expects CPI to moderate to 2.2% from 2.3%, although the headline rate is expected to rise by 0.6% in March, compared to February. The core rate is also expected to moderate to 2.5% from 2.6%. If these numbers are confirmed, then we think that this should give the ECB the green light to cut rates in the near term, even if the outlook for ECB policy is complicated by US trade tariffs.

There is currently an 84% chance of a rate cut from the ECB for this month, and  a 64% chance of another cut in June. The risks for Eurozone CPI could be to the downside after French CPI remained at 0.9% and producer price growth also fell. Spain, which is seen as a lead indicator for the currency bloc, also reported lower inflation, and its headline rate fell sharply to 2.3% in March from 3% in February. If CPI does surprise on the downside, then we may see another lurch lower for the euro, especially if the dollar sell off pauses post the reciprocal tariff announcement.