Monthly report

CIO Report - March 2025

Markets

In March, global financial markets faced significant headwinds, as rising geopolitical tensions and profound shifts in trade policy unsettled investors. The US ultimately imposed a 25% tariff on imports from Canada and Mexico, while simultaneously increasing tariffs on Chinese goods to 20%. These actions prompted retaliatory measures, heightening fears of a global trade war and stagflationary trends. In this environment, central banks are confronted with the challenge of balancing growth stimulation and inflation control, and forecasts for both industrialised and emerging markets were revised downward globally. Global equities, as measured by the MSCI World Index, recorded losses over the month, with US stocks underperforming the broader market. The yields on 10-year US Treasury bonds remained stable at 4.21%, while yields on European government bonds rose due to announced fiscal stimulus measures, such as the “ReArm Europe” programme and the German government’s economic package. This gave the euro a boost, while the US dollar lost appeal and weakened. The gold price surged once again, surpassing the USD 3,000 per ounce mark for the first time.

Outlook

The new US administration under President Trump and Treasury Secretary Bessent is deliberately accepting a weaker economy – and potentially sharper declines in equity markets – in order to bring government debt, long-term yields, and inflation under control. In doing so, no pressure is being placed on the central bank to ease monetary policy. While this approach, combined with a wave of deregulation, is highly sustainable in the medium term, it could in the short-term lead to heightened volatility in risky assets, temporary liquidity shortages, and resulting stress in money markets. These risks should not be underestimated. In the event of a recession, the goal of lower long-term yields could even be temporarily missed, as falling tax revenues might widen the fiscal deficit despite spending cuts. Subsequent deregulation and tax cuts would likely push the deficit even higher, with only a delayed impact on stabilizing economic activity. In Europe, the situation is entirely the opposite of that in the US. A massive increase in government debt is planned – not only in Germany – to finance extensive defense and infrastructure spending. The amounts involved are substantial, with estimates exceeding €2 trillion in the eurozone over a ten-year period. In addition, the ECB is expected to purchase a portion of the new debt. China, too, is ramping up fiscal stimulus programs and easing monetary policy. As a result, strongly opposing forces are currently at work on the global stage: In the US, these tend to be deflationary, yield-dampening, and liquidity-reducing – while in Europe and China they tend to be inflationary, yield-boosting, and liquidity-increasing. This creates, for the time being, a balance between positive and negative factors in both global equity and government bond markets, resulting in neutral short-term price expectations. However, this balance is fragile and could tip at any time if, for example, deflationary forces in the US were to gain the upper hand.

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