Financial conditions remain highly resilient amid trade wars uncertainty
The beginning of the year launched under a general tone of optimism, underpinned by a benign economic growth outlook, policy rate cutting cycles by central banks in major advanced economies, and constructive overall investor sentiment. At that time, investors and analysts were directing most of their attention to any signs that would uncover the direction of the US economy under the incoming administration of President Trump. The new government inaugurated with a strong mandate, as well as the unambiguous willingness, to shake policy and support a pro-business agenda, suggesting an end to the 'business as usual' decision making. Initially, this shift was met with optimism, as markets awaited further tax breaks and deep de-regulation. These expectations supported a rally in US equities and the USD, pointing to US global outperformance.
However, market sentiment began to reverse sharply as the new government began to unveil its policy agenda. On April 2, President Trump declared 'Liberation Day,' announcing sweeping tariffs – including a 10% baseline on all imports, and higher rates on selected countries – with the vague goal of asserting US economic independence. Financial markets reacted negatively to the announcements, with US Treasury yields rising on fears of de-anchored inflation expectations and tainted policy credibility, while the growth narrative debated the odds of a recession, and major stock markets reversed back to pre-election levels.
The Financial Conditions Index (FCI) provides an informative summary of the overall state of markets in advanced economies. The FCI spiked after Liberation Day, briefly reaching levels that typically mark moments of stress, and interrupting the previous trend of easing conditions. In our view, market dislocations will prove to be temporary, and financial conditions are set to improve and resume a more benign trend. We discuss the three main factors that support our outlook.
First, central banks in the two major advanced economies are on track to continue with their policy rate cutting cycles, which will contribute to bring global interest rates down. In the US, inflation is gradually returning to the 2% target of monetary policy, while the economic growth consensus has weakened to a 1.4% expansion for this year, half of the 2.8% rate in 2024. These conditions should prompt the Federal Reserve to implement two further policy rate cuts of 25 basis points (b.p.) during the year, taking the upper bound of the policy benchmark rate to 4%. In the Euro Area, subduing wage and services price pressures support the disinflation trend, while the growth outlook has continued to deteriorate. With this backdrop, the European Central Bank (ECB) is expected to implement one additional rate cut of 25 b.p. during the year, taking the benchmark deposit rate to 1.75% by end-2025. Lower policy rates by the Federal Reserve and the ECB will further reduce borrowing costs for households and business, adding support to consumption and investment.
Second, after a period of high volatility, corporate credit spreads are narrowing, signalling improved market sentiment and easier credit for firms. Corporate credit spreads, defined as the difference between interest rates paid by firms and those paid by sovereigns, are a key indicator of financial conditions, reflecting the compensation demanded by investors for bearing the credit risk of companies. Investment-grade and high-yield spreads have been on a downward trend for several years, interrupted by the recent trade rifts and the uncertainty this represented for investors. Corporate spreads have come down since their peaks this year, and are likely to descend towards more supportive levels, as the more damaging trade-war outcomes become less likely.
Third, after a significant correction following Liberation Day, stock markets have staged a notable recovery backed by resilient corporate earnings and the expectations of monetary easing. Furthermore, markets expectations have readjusted on the premise that initial tariffs threats set the point of departure for negotiations. In the US, major indices have approached previous highs, reflecting increased confidence in a soft landing scenario and the prospects of policy rate cuts, as well as better-than-expected results in key sectors. In Europe, the MSCI Europe Index has been one of the best performing regional indices this year, rising by close to 20% in dollar terms, with a boost provided by Germany's historical fiscal policy shift and alleviating energy price pressures. Going forward, absent a major re-escalation of trade retaliations, or a re-ignition of hard-landing fears, the environment will continue to be supportive for stocks in the major advanced economies.
All in all, in our view, after a bout of significant market volatility, financial conditions in advanced economies will slowly resume their positive trend towards a more supportive environment on the back of policy rate easing cycles, improving corporate credit spreads, and a supportive environment for stock markets.
— By QNB Economics
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Al Jazeera
2 hours ago
- Al Jazeera
US Supreme Court declines to speed up decision to take up fight over tariff
The court declined to fast-track the review of the dispute over Trump having legal power to impose broad tariffs. The United States Supreme Court has declined to speed up its consideration of whether to take up a challenge to President Donald Trump's sweeping tariffs even before lower courts have ruled in the dispute. The Supreme Court denied on Friday a request by a family-owned toy company, Learning Resources, that filed the legal challenge against Trump's tariffs to expedite the review of the dispute by the nation's top judicial body. The company, which makes educational toys, won a court ruling on May 29 that Trump cannot unilaterally impose tariffs using the emergency authority he had claimed. That ruling is currently on hold, leaving the tariffs in place for now. Learning Resources asked the Supreme Court to take the rare step of immediately hearing the case to decide the legality of the tariffs, effectively leapfrogging the US Court of Appeals for the District of Columbia Circuit in Washington, where the case is pending. Two district courts have ruled that Trump's tariffs are not justified under the law he cited, the International Emergency Economic Powers Act. Both of those cases are on appeal. No court has yet backed the sweeping emergency tariff authority Trump has claimed.
Qatar Tribune
a day ago
- Qatar Tribune
EU increasingly resigned to 10% baseline reciprocal tariff in trade talks with US
Agencies Brussels European officials are increasingly resigned to a 10 percent rate on 'reciprocal' tariffs being the baseline in any trade deal between the United States and the European Union, five sources familiar with the negotiations said. President Donald Trump has announced wide-ranging tariffs on trade partners and wants to reduce the US goods trade deficit with the EU. US Commerce Secretary Howard Lutnick has ruled out going below a 10 percent baseline rate for the so-called reciprocal tariffs that cover most goods the EU exports to the US. EU neg are still pressing for the rate to be lower than 10 percent, said the European sources, who spoke on condition of anonymity because of the sensitivity of the talks. But one of the sources, an EU official, said negotiating the level down had become harder since the US started drawing revenues from its global tariffs. 'The 10 percent is a sticky issue. We are pressing them but now they are getting revenues,' said the official. A second European source said there had been no acceptance by the EU of 10 percent as the baseline rate at talks, but acknowledged that it would be difficult to change or abolish that baseline. A spokesperson for the European Commission, the EU's executive body which negotiates trade deals for the 27-nation bloc, did not respond to a Reuters request for comment. The US government also did not immediately comment. US officials have long worked on the assumption that America will end up with higher tariffs with its trading partners and do not expect to move away from the 10% tariff rate in talks with the EU. US Treasury Secretary Scott Bessent told the 'Pod Force One' podcast in an interview broadcast Wednesday that Trump's decision to double tariffs had spurred greater willingness on the part of European leaders to negotiate. The EU has said publicly it will not settle for a double-digit baseline rate - as did Britain, which agreed a limited trade deal in May that retains 10 percent tariffs on British exports while cutting higher rates for steel and cars. Notable orders included one for up to 150 planes for Vietnamese budget airline VietJet. Trump has hit Europe with a 50 percent tariff on steel and aluminium and a 25 percent levy on cars, and the EU is trying to secure a deal before July 9, when reciprocal tariffs on most other goods could rise from 10 percent to up to 50 percent. With an annual trade surplus of $236 billion with the US in 2024, the EU has more to lose from tariffs than non-EU member Britain, which runs a trade deficit with the US. Trump, who has said he wants to use tariff revenues to help finance his sweeping tax-cut and spending bill, said on Tuesday the EU was not offering a fair deal. Washington has sought to fold non-tariff barriers, such as digital services taxes and corporate sustainability reporting rules, as well as LNG sales and food standards into the talks. The US posted a $258-billion budget surplus for April, up 23 percent from a year earlier, and the Treasury Department said net customs duties in April more than doubled versus the same period last year. The sweeping tariffs imposed by Trump since early April and the subsequent pauses on some of them have generated upheaval for companies worldwide, causing some to withdraw or refrain from giving financial guidance. European automakers have been hit hard. Mercedes pulled its earnings guidance, Stellantis suspended its guidance and Volvo Cars withdrew its earnings forecasts for the next two years. One European car executive said premium carmakers could stomach a 10 percent tariff but that it would be much tougher for a mass-market producer. The tariffs targeting steel and aluminium, and cars and car parts, were applied on grounds of national security, with investigations into pharmaceuticals, semiconductors, timber and trucks possibly leading to further increased duties. EU officials say they are not willing to accept these. Trump said on Tuesday that pharma tariffs were 'coming very soon'. A pharma industry source said the European Commission was resisting sector-specific tariffs. The Commission has told the pharma industry that while it does not want the 10% baseline reciprocal tariffs, accepting a 10% base tariff may provide leverage in those negotiations, the source said. A European beverage industry source said the wine and spirits sector would rather have a deal at 10 percent than protracted negotiations. Not securing a deal would have a 'huge negative impact... on our market,' said Rob van Gils, CEO of Austrian company Hammerer Aluminium Industries. 'It can be 0 it can be 10 percent. If it's both ways that's all manageable. It will not kill business.'
Qatar Tribune
a day ago
- Qatar Tribune
US firms eye partnerships to tap European defence spending boom
Agencies Top U.S. defence firms, backed by a strong Congressional delegation from Washington, used this week's Paris Air Show to showcase cutting-edge technologies and court European partners as they seek to tap into rising regional military spending. Many European nations have pledged to significantly increase defence budgets in response to Russia's invasion of Ukraine and as U.S. President Donald Trump's administration has threatened to scale back military support for the region. That tension has been notably absent at this week's Paris Air Show, where U.S. lawmakers and arms manufacturers pledged greater transatlantic partnership as Europe ramps up spending on everything from artillery shells and fighter jets to missile defence systems. 'We understand that our allies and partners are a force multiplier, so we are stronger when we are working together,' U.S. Senator Jerry Moran, a member of Trump's Republican party, told reporters at the show, the world's largest aerospace and defence gathering. Moran, whose delegation was supporting U.S. weapons makers, said it was in Paris to send a message that the U.S. 'is a dependable and reliable partner.' The conciliatory tone stands in stark contrast to the Trump administration's recent string of disparaging remarks about Europe and its defence industry. 'I think antagonizing our allies does not make us stronger,' Democrat Senator Jeanne Shaheen told reporters in Paris, expressing her desire to cement defence relations with Europe. Despite pledges by many European nations to boost military self-sufficiency, the continent remains heavily reliant on U.S. defence manufacturers. For instance, Europe buys American-made fighter jets and missiles from Lockheed Martin, Patriot missile defence systems from Raytheon Technologies and military jets and helicopters built by Boeing. In emerging military areas, like artificial intelligence, drones and satellite constellations, U.S. tech firms like Anduril, Palantir and Elon Musk's SpaceX are far ahead. U.S. firms are hoping to press home their advantage as European military spending surges, including through partnerships, which are a way to soften any potential diplomatic tensions, delegates said. U.S. drone-maker Anduril and German defence giant Rheinmetall said on Wednesday they will link up to build military drones for European markets, in a sign of Europe leveraging American technology to boost military capabilities. Thomas Laliberty, president of Land & Air Defence Systems at Raytheon, said there were no easy replacements for its weapons in Europe and he expected the firm to maintain a long-term footprint on the continent, including through new partnerships. Laliberty said Raytheon was close to announcing a plan to manufacture Stingers – a lightweight air defence missile used by Ukrainian forces against Russia – in Europe. 'For immediate needs, Raytheon is well-positioned to support the European demand,' Laliberty told reporters in Paris. 'We have a very bright future here.' Boeing, which won a contract from Trump's administration to develop the next-generation F-47 fighter jet this year, said Europe and the U.S. would remain long-term partners despite political wobbles, partly to hold off the Chinese threat. 'Nobody can do it themselves – maybe the Chinese can try, but certainly the rest of us, we are going to have to work together,' said Turbo Sjogren, Boeing's general manager for government services. 'To do otherwise takes too long and will be unaffordable.' The chairperson of Italian aerospace and defence group Leonardo, Stefano Pontecorvo, added that U.S. participation in some European programs would be 'unavoidable' in the coming years due to the defence technologies available to rivals were bullish about their future growth prospects but said budget constraints and a lack of regional alliances were holding back progress, conceding that they would continue to need significant U.S. support. 'National sovereignty matters, but fragmentation is detrimental. We need to find a way to hit a balance,' Leonardo CEO Roberto Cingolani told reporters on Tuesday. Jean-Brice Dumont, head of air power, defence and space at Airbus, said Europe's dependence on the U.S. was 'very high.' 'Zero dependency on the U.S. I believe, is a dream. We have a need for interoperability that drives some U.S. needs,' said Dumont, whose firm makes the Eurofighter Typhoon fighter jet with Britain's BAE Systems and Italy's Leonardo, as well as Earth observation satellites and drones. Italian Defence Minister Guido Crosetto said Europe had 'too much bureaucracy' compared to the U.S. and needed to adapt to a new military era of faster, cheaper and more nimble technology. 'Either Europe adapts its industry to these new parameters – different from those with which it has lived until four years ago – or it will have huge competitors, and not only the American ones,' he said.
