Understanding Recent Tariffs and Market Impact

The following market analysis has been prepared by our strategic partner, Canaccord Genuity Wealth Management and LGT Wealth. Their team of expert analysts provides valuable perspective on market movements and economic developments.

Melbourne Capital Group is pleased to share these insights as part of our commitment to keeping clients informed during periods of market volatility. For regular access to comprehensive market analysis, economic outlooks and investment strategies, subscribe to our newsletter here.

Market Overview: A Week of Significant Adjustments

The global financial markets experienced considerable turbulence following US President Trump's sweeping tariff announcements last week. Equity markets worldwide saw sharp declines, with US equities falling 8.8%, global equities dropping 7.5%, and UK equities declining 7.1%. The impact was particularly pronounced in Japan, where markets tumbled 10.0% in local currency terms.

Bond markets provided some counterbalance during this volatile period, with yields on sovereign debt falling significantly. The 10-year US Treasury yield decreased by 0.26% to 3.99%, while the UK 10-year gilt yield fell 0.25% to 4.45%.

Understanding the Context: Trade Policy and Global Imbalances

The recent market volatility stems from fundamental economic concerns related to the US's dual deficit challenge – both trade and budget deficits. This structural issue, sometimes referred to as the "Triffin Dilemma," is a consequence of the dollar's role as the global reserve currency and has contributed to economic imbalances, industrial decline in certain sectors, and increased inequality.

The new US administration appears determined to address these imbalances through unconventional methods aimed at restructuring the global trading system to favour blue-collar America. The underlying argument suggests that US consumer demand has been diverted to the global economy at the expense of domestic production.

The "Liberation Day" Tariff Strategy

Last Wednesday, dubbed "Liberation Day" by the administration, President Trump announced extensive tariffs targeting over 180 countries. These tariffs reflect a calculated approach to balancing trade deficits, with the administration suggesting they are simply matching the protectionist measures already employed by many trading partners.

The market's sharp reaction reflects the challenge of adjusting to this new paradigm, which includes:

• Trade-driven inflation concerns

• Potential policy divergence between countries

• Increased geopolitical complexity

Global Response: Negotiation vs. Escalation

The response to these tariffs will likely vary among trading partners. While many countries are expected to pursue negotiations for softer terms, China's surprise retaliatory 34% tariff signals a potential for escalation and marks the beginning of the next phase in this trade conflict.

"Clearly those tariffs are having a dramatic effect on the market. Do we think this is a bit of an omen of things to come or are we treating it more like an opportunity? Markets are funny and from at least my experience over 30 years in markets, when we go through periods like this of heightened uncertainty and more importantly, policy measures that the markets do not like, they'll keep falling until we do see some form of policy reaction," notes Sanjay, Chief Investment Officer at LGT Wealth.

Potential policy reactions can come in 3 forms:

• Federal Reserve intervention through rate cuts appears unlikely in the near term, as Chairman Powell indicated uncertainty about inflation impacts while acknowledging tariffs will have some effect.

• Congressional action to rein in tariffs faces significant challenges given President Trump's substantial political influence.

• Emergency tax cuts, while discussed by the administration, would likely fall short of offsetting the estimated $800-900 billion impact that increased tariffs could impose on US consumers.

Key Economic Indicators to Watch

Several important economic indicators will help provide context for market movements in the coming days:

US CPI Inflation (Thursday): Headline inflation is expected to slow to 2.6% in March, down from 2.8% previously. Core inflation is also anticipated to ease slightly. Inflation concerns remain front and centre for markets, particularly as the newly announced tariffs have lifted inflation expectations. The Federal Open Market Committee (FOMC) minutes may provide additional insight into shifting policy stances.

UK Monthly GDP (Friday): UK GDP is expected to come in at 0.1% in February, following a contraction in January. Q1 2025 data points to a fragile recovery, and escalating trade tensions could further weaken economic activity.

Investment Implications and Strategy Considerations

The current market environment demands careful consideration of investment strategies:

1. Portfolio Diversification: In times of heightened volatility, diversification across asset classes remains crucial

2. Quality Focus: High-quality bonds and inflation-linked securities have outperformed in the recent market turbulence

3. Sector Allocation: Companies most directly impacted by tariffs, particularly US domestic firms with offshore supply chains, have been among the worst performers

LGT Wealth sees selective opportunities emerging amid the volatility. "Certain markets are looking really cheap. Every nation is going to be hit but opportunities are emerging. Are we brave enough to go in and catch this falling knife? Maybe in very small incremental steps, not to make a big move," suggests LGT Wealth's Chief Investment Officer.

Melbourne Capital Group's Perspective

At Melbourne Capital Group, we recognise that periods of market volatility create both challenges and opportunities for investors. While sharp market movements can be unsettling, they often reflect a repricing of risk rather than fundamental economic deterioration.

We continue to monitor developments closely, particularly focusing on:

• Trade negotiation outcomes between major economies.

• Inflation data and central bank responses.

• Earnings impact across different sectors and geographies.

Our investment approach remains disciplined and focused on long-term objectives, while making tactical adjustments as market conditions evolve.

We will be covering this period of uncertainty at our upcoming seminar with our partner, Pacific Asset Management. Seats are limited.

Register here.

Date: Thursday, 15th May 2025.

‍Time: 5.30 PM Malaysia Time (GMT+8).

‍Location: WIP on the Park, KLCC.

As always, our team at Melbourne Capital Group remains available to discuss your specific investment needs and concerns during this dynamic market environment. Contact us at info@melbournecapitalgroup.com for more information.

Note: This article reflects information available as of April 8, 2025. Market conditions may change rapidly, and investors should consult with their financial advisors before making investment decisions.

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