Is Trump’s tariff policy a sign of more unpredictability to come?

Is Trump’s tariff policy a sign of more unpredictability to come?

09 May 2025

President Trump’s “Liberation Day” tariffs sent shockwaves through global financial markets in April, with the introduction of a 10% universal tariff and additional tariffs targeting countries with US trade deficits. The announcement triggered a massive sell-off in equities and US bonds, prompting the President to announce a 90-day suspension for most countries.

However, retaliatory tariffs from China have escalated tensions, sparking a tariff war between the world’s two largest economies.

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If the first 100 days are anything to go by, then unpredictability is likely to be a key theme of President Trump’s second term. Global equities were significantly down for the third consecutive month over April, with the gains made in the second half of 2024 now wiped out. Emerging markets have followed a similar path to global markets on the whole and posted a third consecutive month of negative growth. The US typically have larger trade deficits with emerging market economies and have therefore targeted these economies with higher tariff rates.

Having sold off sharply in March, UK equities were more stable in April but were still unable to post positive performance as risk assets sold off. The sell-off was good news for precious metal holders as gold continued its surge since the beginning of 2024, rising by 26% in the past four months alone.

The fallout from Trump’s Liberation Day poses a conundrum for the Federal Reserve (Fed) as it looks to bring down borrowing costs. On the one hand, a trade war with China is likely to contribute to rising prices in the US, which may prompt the Fed to leave borrowing costs higher for longer.

On the other hand, stagnation in US economic growth could be boosted by the Fed reducing interest rates more rapidly. The US economy contracted by 0.3% during the first quarter of 2025 as President Trump again lashed out at Fed Chair Jerome Powell for not having cut interest rates sooner.

UK inflation fell by more than expected during March as the annual increase in consumer prices dropped by 0.2% to 2.6%. A key contributor to falling inflation in the UK over April was petrol prices as the price of Brent Crude oil hit a 4-year low during the month. Longer-term inflation expectations reduced over the month, potentially due, in part, to the anticipation of cheaper international goods being redirected from the US to UK markets. The Bank of England reduced the Bank rate by 0.25% to 4.25% in early May. Markets are predicting two more quarter percentage rate cuts this year, which would see the Bank rate fall below 4% for the first time since February 2023.

Despite some volatility during the month, fixed interest gilt yields fell modestly over April, which resulted in positive performance for the asset class. They also significantly outperformed their index-linked counterparts. UK Corporate Bond performance benefited from falling gilt yields, although credit spreads increased moderately. Global high yield bonds had been one of the strongest performing asset classes since the beginning of 2024, but have experienced a difficult three months since their high of January 2025. Record outflows were seen from high-yield bond funds in the aftermath of Liberation Day, which saw the asset class post significant negative returns.

The combination of falling gilt yields, increasing the value of liabilities, and a sell-off in growth assets is expected to have been detrimental to UK defined benefit pension scheme funding on the whole during April.

If the first 100 days are anything to go by, then unpredictability is likely to be a key theme of President Trump’s second term.

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For further information, please get in touch with James Zhang or speak to your usual XPS Group contact.

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