Global Markets Weekly Update

U.S.

Trade policy uncertainty leads to volatile week for U.S. stocks

U.S. stocks closed higher after a volatile week in which a slew of trade-related headlines continued to dominate investor sentiment. The week opened with equities sharply lower, extending losses from the prior week, as negative sentiment intensified ahead of Wednesday’s implementation of the Trump administration’s latest round of tariffs. However, on Wednesday, President Donald Trump announced that he was authorizing a 90-day pause on the higher reciprocal tariffs for most countries, effective immediately, to allow time for negotiations. The news sent stocks rocketing higher, with the Nasdaq Composite gaining over 12% and logging its second-best day on record.

Notably, however, the Trump administration excluded China from the 90-day pause, instead announcing several increases to tariffs on Chinese goods throughout the week (up to 145%), while China responded with several increases to levies on U.S. imports (up to 125%). The escalating trade war between the world’s two largest economies—and concerns about the broader impact it could have on global economic growth—appeared to dampen some of Wednesday’s positive sentiment, which led to stocks giving back some gains on Thursday. Once the dust settled, the S&P 500 Index finished up 5.70% for the week, while the Nasdaq Composite closed 7.29% higher. The Russell 2000 Index lagged but still posted 1.82% gains.

Fed officials taking a “cautious approach” amid heightened uncertainty

Meanwhile, the Federal Reserve released minutes from its March policy meeting on Wednesday. According to the minutes, policymakers “generally saw increased downside risks to employment and economic growth and upside risks to inflation while indicating that high uncertainty surrounded their economic outlooks.” Meeting participants also “judged that inflation was likely to be boosted this year by the effects of higher tariffs,” and most members favored a “cautious approach” to monetary policy amid “uncertainty about the net effect of an array of government policies on the economic outlook.”

While Fed policymakers believe they remain well positioned to respond to incoming data and adjust monetary policy as needed, they also acknowledged that they “may face difficult trade-offs if inflation proved to be more persistent while the outlook for growth and employment weakened.”

Price growth slows in March, but consumer sentiment continues to decline

Elsewhere, the Bureau of Labor Statistics released its March consumer price index (CPI) data on Thursday, reporting that core (less food and energy) prices rose 0.1% from the prior month, the lowest reading in nine months. Year over year, core prices rose 2.8%, the smallest 12-month increase since March 2021.

The report indicated some welcome relief for consumers prior to the latest round of tariffs; however, on Friday morning, the University of Michigan reported that its Index of Consumer Sentiment’s year-ahead inflation expectations surged to 6.7% in April, the highest level since 1981, “amid growing worries about trade war developments that have oscillated over the course of the year.” The overall index reading declined for the fourth straight month to 50.8, down 11% from March and the lowest level since June 2022.

Treasury yields surge on trade war concerns

The volatility and uncertainty around global trade during the week weighed on U.S. Treasuries, which generated negative returns as yields increased across most maturities. (Bond prices and yields move in opposite directions.) Long-term yields saw the sharpest increase, followed by intermediate- and short-term yields. The yield on the benchmark 10-year Treasury note rose to well over 4.5% by Friday morning after ending the prior week under 4%.

Investment-grade corporate bonds also posted negative returns and underperformed Treasuries. T. Rowe Price traders observed that new issue supply in the investment-grade corporate market was well below weekly expectations, though issues were generally oversubscribed. Our traders also reported that high yield bonds performed well on Wednesday following President Trump’s 90-day pause on tariffs, although the asset class came under pressure along with the move in equities and rates as sentiment turned negative later in the week.

Europe

In local currency terms, the pan-European STOXX Europe 600 Index ended 1.92% lower as trade tensions intensified. However, markets rebounded, narrowing losses, after U.S. President Donald Trump said that he would delay the imposition of “reciprocal” tariffs for most trading partners. Major stock indexes fell. Germany’s DAX declined 1.30%, Italy’s FTSE MIB decreased 1.79%, and France’s CAC 40 Index lost 2.34%. The UK’s FTSE 100 Index slipped 1.13%.

Central banks raise vigilance as markets seesaw

The market turmoil sparked by Trump’s tariff announcements prompted central banks in the eurozone and the UK to step up their monitoring of financial institutions and markets. The European Central Bank called on banks to check on deposits and other forms of funding more frequently. The Bank of England (BoE) asked lenders for information about market liquidity and whether hedge funds and other clients were facing problems. The BoE also amended its schedule for bond sales in the second quarter in response to market volatility, delaying auctions of long-dated gilts. Meanwhile, its Financial Policy Committee warned that there could be further market corrections. It highlighted that the fragmentation of global trade and stress in financial markets could harm financial stability by depressing economic growth.

Industry output in Germany and Italy shrinks; Italian economy falls short in 2024

German industrial production contracted in February by 1.3% sequentially, after increasing 2% in January. Output declined in the construction, energy, and food industries. However, expansion in electrical equipment manufacturing partially offset the losses. In Italy, industrial output fell 0.9% sequentially in February and 0.7% in the December-February quarter.

ISTAT, the Italian statistics agency, also reported that the country’s economy grew 0.7% in 2024, less than the official forecast of 1.0%. The Treasury sharply reduced its projection for growth in gross domestic product (GDP) to 0.6% from a previous level of 1.2% set last September. Italy has a large trade surplus with the U.S. and would be subject to a general tariff of 20%.

UK economic growth surprises on the upside

The UK economy expanded 0.5% in February, as stronger services output helped growth beat the median forecast for GDP growth of 0.1%. On a year-over-year basis, gross domestic product rose 1.4%, a growth rate that exceeded the consensus estimate. Still, financial markets expect the BoE to accelerate its rate-cutting cycle this year.

Japan

Tariffs weigh on Japanese stocks

Japan’s stock markets fell over the week, with both the Nikkei 225 Index and the broader TOPIX Index down around 0.6%. The indexes plunged on Monday as the sell-off triggered by the U.S. administration’s aggressive tariffs and fears about a global trade war intensified. Japanese banks suffered some of the sharpest declines on the day.

U.S. authorities’ willingness to begin trade talks with Japan offered some respite, and later in the week, Japanese shares surged on the announcement that new tariff rates on most U.S. trading partners would be lowered to 10% for 90 days (a 24% levy had been applied on Japanese imports). Notably, the 25% tariff imposed on Japan’s automotive imports into the U.S. was not included in the reciprocal tariff pause. Japan is seeking an exemption from higher tariffs.

Yen strengthens amid sell-off in U.S. Treasuries

Concerns about recessionary conditions in the U.S. and a sell-off in U.S. Treasuries drove investors to seek assets such as the yen that are perceived as safer. The Japanese currency strengthened to the high end of the JPY 142 range against the U.S. dollar, from close to JPY 147 the prior week. Japanese authorities noted that they had been highly alarmed by foreign exchange movements and urged global cooperation to fight tariff impacts.

The yield on the 10-year Japanese government bond rose to 1.36% from 1.18% at the end of the previous week. Some signs of stabilization in the stock markets lent support to the belief that the Bank of Japan’s (BoJ) monetary policy normalization process remains on track. While the central bank’s next interest rate increase could be delayed, it has good reason to tighten monetary policy, given the resilience of both wage and services inflation. BoJ Governor Kazuo Ueda said that there is increased uncertainty about tariff policies and their impact on the global economy and that the central bank would continue monitoring developments and conduct policy accordingly.

China

Mainland Chinese stock markets recorded a weekly loss, but declines were tempered by hopes that the spiraling trade war with the U.S. would lead Beijing to roll out fresh stimulus that would boost the economy. The onshore benchmark CSI 300 Index shed 2.87%, and the Shanghai Composite Index fell 3.11% in local currency terms from the prior week’s close. In Hong Kong, the benchmark Hang Seng Index slumped 8.42%. Both the CSI 300 and Shanghai Composite indices advanced for four straight trading days ended Friday following reports that top government leaders met Thursday to discuss additional stimulus to counter higher U.S. tariffs.

On Friday, China raised tariffs on U.S. goods to 125% from 84% starting April 12, a day after the Trump administration clarified that the total tariffs on China reached 145%. However, Beijing called the U.S.’s latest increase a “joke” and appeared to rule out any more increases on its part. “The U.S.’s repeated imposition of abnormally high tariffs on China has become a numbers game, which has no practical economic significance,” a Ministry of Commerce spokesperson said in comments posted on its site. “If the U.S. continues to play the numbers game of tariffs, China will ignore it.”

U.S. levies may reduce China’s gross domestic product between 1% and 2% this year, T. Rowe Price economists believe, a forecast that predated the past week’s tariff escalation. Regardless of the magnitude of headline tariff increases, our economists think that Beijing has the capacity to offset their impact through more fiscal stimulus. Given that China’s economy has been deleveraging for the past several years in the aftermath of a nationwide property bubble, policymakers have more room to maneuver. Moreover, China’s leaders have clearly signaled their intention to boost domestic consumption, a trend that is expected to continue.

Other Key Markets

Hungary

Inflation may keep falling, though tariff news and currency moves create uncertainty

Earlier in the week, the Hungarian government reported that inflation in March was measured at a year-over-year rate of 4.7%. This was lower than expected and lower than the 5.6% year-over-year rate measured in February. According to T. Rowe Price credit analyst Ivan Morozov, food prices contributed most to the decline, but the key development was a deceleration in core momentum to 0.2%, as a repricing of services—which took place earlier than usual this year—was reflected less in the latest data.

Going forward, Morozov believes that inflation is likely to keep falling but stay around 4%, though he acknowledges a high degree of uncertainty around that forecast due to global tariff developments. Unlike its peers in Central and Eastern Europe, Hungary’s central bank seems to be more sensitive to foreign exchange developments. Morozov, therefore, believes that policymakers will probably leave interest rates unchanged this year if inflation behaves as they expect.

Latin America

The U.S. tariffs unveiled last week continued to rock financial markets around the world, but they may have different implications for different regions and individual economies. T. Rowe Price emerging markets sovereign credit analysts Aaron Gifford and Christopher Mejia and Associate Portfolio Manager Richard Hall offer their thoughts about the implications of U.S. tariffs on the Latin America region:

The region could be a relative winner…

Most countries in the region incurred reciprocal tariffs at the minimum rate of 10%, except for Mexico, which President Trump left to negotiate separately along with Canada. Our assessment indicates that the region was left relatively unscathed—not because of any regional affinity, but because most Latin American countries (Mexico being a notable exception) already have trade deficits with the U.S. Still, the different tariff treatment across regions could drive a gradual reorientation of global trade and foreign direct investment away from Asia and toward Latin America over time, all other things being equal.

…but second-round effects are likely to be significant

For Latin America, we expect negative spillovers from weaker global growth, higher inflation, and depressed commodity prices. On the positive side, energy and select metals were excluded from President Trump’s reciprocal tariffs, resulting in effective tariff rates below 10% for countries like Colombia and Ecuador (oil exporters), as well as Chile and Peru (copper producers). However, these nations remain vulnerable to price declines, and there’s still the risk of Trump implementing sectoral tariffs later. Energy importers could see marginal benefits, but terms of trade would likely remain negative for Chile and Peru. Meanwhile, more closed economies with large agricultural sectors, such as Brazil and Argentina, could prove more resilient. On the growth front, a weaker U.S. economy would impact countries highly exposed to U.S. manufacturing, such as Mexico, or heavily dependent on remittances, including Guatemala, El Salvador, and the Dominican Republic. Finally, tighter financial conditions will be challenging for all countries, but especially those with limited market access and limited domestic financing capabilities, such as Ecuador and Panama. Argentina and El Salvador face similar risks, but they may benefit from International Monetary Fund (IMF) programs and political alignment with President Trump.

Economic imbalances are manageable, but policy inflexibility could constrain some countries

Fiscal challenges are the most apparent, especially for Brazil, Colombia, Mexico, and Panama. Slowing growth will complicate efforts to control spending, especially for populist governments facing upcoming elections, such as Colombia and Brazil. Some countries still have considerable room to ease monetary policy, though they risk having to cut rates while inflation remains sticky and currencies are weakening. External fundamentals look considerably healthier, with current account deficits at moderate levels and adequately financed. Higher risks exist in dollarized or quasi-dollarized economies, such as Argentina and Ecuador, though country-specific factors will likely dominate there.