United States: Tariff Shockwaves, Market Carnage, and the Fed on Watch

Sentiment soured across financial markets this week as President Trump’s sweeping reciprocal tariffs took full effect, jolting investor confidence and triggering the worst equity selloff since the pandemic era. At the centre of the storm was a controversial formula devised by the administration, where the United States halved each bilateral trade deficit to determine a corresponding tariff rate. This crude logic pushed America’s effective tariff level to its highest point since 1909, drawing fierce criticism from economists and market participants alike.

The fallout was immediate and severe. The S&P 500 plunged 4.8% in a single session, wiping out close to $2.5 trillion in market value, while the Nasdaq slumped 6%, its sharpest drop since 2020. Apple alone shed more than $300 billion, as tech stocks led the downturn. Concerns over higher input costs and supply chain disruptions weighed heavily on firms reliant on imported goods and components. Gold surged past $3,100 an ounce as a flight to safety intensified, while Brent crude collapsed by 7% to $69.60 per barrel, its steepest one-day fall in nearly three years, after OPEC unexpectedly accelerated plans to unwind production cuts.  Economic data did little to calm nerves. While the US economy added 228,000 jobs in March, more than expected, the underlying tone was cautious. Job gains were concentrated in health care, social assistance, and warehousing, while federal government employment declined for the second consecutive month.

The ISM Manufacturing PMI fell back into contraction at 49, with new orders, employment, and production deteriorating. Price pressures climbed sharply to 69.4, the highest since mid-2022, as businesses reported cost spikes driven by the new tariffs. The services sector also showed signs of strain. The ISM Services PMI dropped to 50.8, narrowly avoiding contraction, with employment falling to 46.2 and new orders slowing to 50.4. Businesses noted significant disruptions and uncertainty caused by the new trade regime. Logistics firms like DHL reported a sharp rise in demand for foreign trade zones, as businesses looked to delay tariff exposure. Bond markets rallied on safe haven flows, with 10-year Treasury yields falling to 4.06%, and markets now fully pricing in up to four rate cuts by year end.

Chart: Market Yield on 10Y US Treasuries, FRED

Confusion and scepticism also mounted over the White House’s methodology. The so-called “reciprocal” tariffs were based not on existing barriers, but on a ratio of trade deficits to imports. Economists from Deutsche Bank, LSE, and Oxford Economics labelled the approach deeply flawed, arguing that trade balances are shaped by savings and investment patterns, not tariffs. Academic references cited by the administration, including work by Pau Pujolas and Brent Neiman, were taken out of context, with the authors distancing themselves from the administration's simplistic extrapolations.

United Kingdom: Diplomacy at a Cost, Starmer’s Gamble and the Manufacturing Squeeze

In contrast to the broader transatlantic fallout, the United Kingdom managed to secure a 10% baseline tariff, avoiding the harsher penalties inflicted on the European Union and several Asian economies. Prime Minister Keir Starmer’s diplomatic overtures have so far spared the UK from the most damaging trade frictions, but the relief may be short lived. Key export industries including autos and steel now face tariffs as high as 25%, threatening tens of thousands of jobs, particularly at manufacturers like Jaguar Land Rover and Mini. The Scotch whisky sector alone could see annual losses of up to £400 million.

The government has initiated a formal four-week business consultation to consider retaliatory action. A provisional list of over 8,000 product lines has been published, targeting goods that would minimise domestic economic harm while sending a political message. Items range from motorbikes and denim to frozen bovine tongue and human hair. Ministers continue to seek a trade agreement with the US before the 1st May deadline, with offers including the scaling back of the UK’s digital services tax and lower duties on certain meat and seafood imports.

Chart: Net Change in UK GDP Growth Against Net Change in Mortgage Lending, TE

Economic momentum remains weak. GDP contracted by 0.1% in January, and although February retail sales rose by 0.9%, the outlook remains subdued. The UK labour market is softening, with permanent hiring falling for the 29th consecutive month and wage growth slowing. In the housing market, gross lending rose to £24.3 billion in February, its highest since November 2022, but repayments also surged to £19.8 billion, leaving net mortgage borrowing at just £3.3 billion. Annual net lending growth remained stable at 1.9%, reflecting cautious sentiment amid persistent cost of living pressures.

European Union:  Retaliation in Waiting, Brussels Weighs its Arsenal as Growth Wobbles

The European Union has vowed to respond firmly to the United States’ 20% tariffs but is holding off immediate retaliation in favour of a four-week negotiation window. European Commission President Ursula von der Leyen stated that all instruments remain on the table, including suspending procurement access for US firms, tightening intellectual property rights, and deploying the bloc’s new anti-coercion instrument. The EU is also preparing a separate €26 billion countermeasure targeting US steel and aluminium, to be announced mid-April. However, internal divisions are evident, with France seeking exemptions for bourbon and Ireland for dairy. Italy’s Prime Minister Giorgia Meloni has called for dialogue over confrontation.

The economic backdrop in the euro area is already precarious. The ECB’s March meeting account highlighted growing concern over inflationary pressures from both tariffs and fiscal expansion, particularly in defence. Despite six successive rate cuts since mid 2024, policymakers remain uncertain whether monetary policy is still restrictive enough. Growth forecasts have been lowered to 0.9% for 2025, and inflation is projected to remain above target through 2026. Nonetheless, many members expressed caution against rushing into further easing without clear evidence. ECB officials are split. Christine Lagarde warned that trade conflict and a weaker euro could stoke inflation, while Greek central bank governor Yannis Stournaras argued tariffs are deflationary and risk undermining already tepid demand. Markets now anticipate another 25-basis point cut this month, with further easing in June and September.

Germany remains a bellwether. March consumer inflation slowed to 2.2%, the lowest since November 2024, with core inflation at 2.5% and energy prices falling by 2.8%. Food inflation ticked up to 2.9%. The trade surplus widened to €17.7 billion in February, with exports to the US and China showing resilience. Still, subdued domestic consumption and weak factory orders are likely to drag on the bloc’s recovery.

Chart: Percentage Change in Germany’s Trade Surplus, TE

Outlook

The global economy is entering a period of heightened policy uncertainty and potential stagflation. While employment remains resilient in the United States, weakening PMI data and tariff induced cost pressures point to a slower second quarter. The Federal Reserve is likely to lower rates, but doing so amid persistent inflation risks could damage its credibility. The collapse in equity valuations and rise in haven assets signal a repricing of growth expectations across the board.

In the United Kingdom, hopes for a trade resolution with the US persist, but political pressure to retaliate is mounting. Starmer’s government must tread carefully to protect industrial jobs while maintaining macro stability. Fiscal room remains limited, and any external shock could necessitate unpalatable policy choices later in the year.

For the European Union, the path forward is increasingly complex. Policymakers must balance deflationary pressures from weaker demand against potential inflationary spillovers from trade rerouting and currency depreciation. As the bloc eyes strategic autonomy in sectors like energy and defence, it must also prepare for the longer-term structural impacts of decoupling from key markets. From an investment strategy perspective, we remain underweight United States equities, with a defensive tilt toward European quality growth. Duration appears increasingly attractive in both United States and euro area sovereigns, given the expected dovish pivots. Commodities are likely to remain volatile, though gold may continue to benefit from geopolitical hedging. As the second quarter unfolds, a flexible and globally diversified positioning will be essential.

Disclaimer

This website and all materials contained herein are issued by Regal Capital Botswana (Pty) Ltd ("Regal Capital") for informational purposes only and do not constitute investment advice, a solicitation, or an offer to buy or sell any financial instruments. The content is general in nature and does not consider specific investment objectives, financial situations, or individual needs. While Regal Capital strives for accuracy, no representation or warranty, express or implied, is made regarding the completeness, reliability, or accuracy of the information. Any opinions or estimates reflect the author’s judgment as of the publication date and are subject to change without notice. Regal Capital, its affiliates, directors, employees, agents, or contractors shall not be liable for any direct, indirect, or consequential loss or damage resulting from the use of or reliance on this website. Users should seek independent financial advice before making any investment decisions.

All intellectual property rights in this website are proprietary to Regal Capital or authorized third-party sources. No content may be reproduced, distributed, or transmitted without prior written permission. Investing involves risks, including potential capital loss. Past performance is not indicative of future results, and investments in foreign currencies are subject to exchange rate fluctuations. The strategies or instruments mentioned may not be suitable for all investors.

By accessing research materials, users acknowledge that Regal Capital and its affiliates may hold positions in securities discussed. Research is provided “as is” without warranties of accuracy or completeness and should not be considered a recommendation or solicitation. Users are encouraged to conduct their own due diligence and consult financial, legal, or tax advisors. Regal Capital is not liable for any trading losses, lost profits, or other damages resulting from reliance on its research. Use of this website is governed by the laws of Botswana, and users agree to the jurisdiction of its courts for any disputes