Muzinich Weekly Market Comment: Never wake a sleeping bear

March 17, 2025

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In our latest roundup of the key developments in financial markets and economies, we look back at another week marred by trade tensions and an ominous US dollar statistic.

Last week was another frustrating one for investors, as geopolitical tensions continued to drive sentiment.

Fireworks erupted after the US announced a 25% tariff on all steel and aluminium imports, eliminating previous exemptions and applying the policy globally with no exceptions.^[1] Canada’s countermeasures prompted President Trump to double the tariff on Canadian steel and aluminium to 50% before both sides backed down, Ontario suspending its electricity export tariff and Trump scaling back Canadian tariffs to 25%.^[2]

Meanwhile, the European Union proposed countermeasures on €26 billion of American goods.^[3] That triggered an equally aggressive response from Trump, who threatened a 200% tariff on European alcoholic beverages, including wine and champagne.^[4]

Last week's escalating hostilities, combined with the looming announcement of larger reciprocal tariffs on April 2, have deepened the mood of uncertainty. As a result, consumers, investors and businesses are adopting a "wait-and-see" approach to spending and investment. If we use equities and currencies as a barometer of sentiment, the fallout seems primarily concentrated in the US. Government bond yields climbed, with both US Treasury and German Bund 10-year bonds rising by 8 basis points (bps).

Inflation not as bad as feared

It was a crucial week for US pricing data, with both consumer and producer inflation coming in softer than expected.^[5] However, key components that influence the Fed's preferred inflation measure, the Personal Consumption Expenditures Core Price Index, showed signs of acceleration. This has raised concerns that the Federal Reserve may struggle to meet its inflation target while also easing policy rates.

In Europe, German Chancellor-elect Friedrich Merz reached a tentative agreement with the Green Party on a debt-funded defence and infrastructure package.^[6] Meanwhile, the European Central Bank (ECB) continued its hawkish stance, signalling to investors that a pause in the rate-cutting cycle may be imminent.^[7]

For the remainder of the year, the overnight interest rate swap market is pricing in quarterly 25bps rate cuts from the Fed, beginning in June. Meanwhile, the ECB is expected to implement one more rate cut in June, with an 84% probability of an additional 25bps cut by year-end.^[8]

EM the standout

In corporate credit, emerging markets continued to outperform. Month-to-date, credit spreads in EM high yield have widened by 14bps, compared to 21bps in Europe and 53bps in the US. Emerging markets seem to be benefitting from not being the focus of President Trump's tariff ire, along with underweight positioning by global investors, rising commodity prices, and a weaker US dollar.

Energy prices remained range-bound as discussions over a potential Ukraine-Russia ceasefire continued, and precious metals saw further gains. Meanwhile, after another dismal week, cryptocurrencies have seen a complete reversal of their gains since Trump’s inauguration rally.^[9]

Volatility continues to afflict equity markets. Asia was the outlier, with the Nikkei, Shanghai Composite and Korea Composite Stock Price Index all closing the week higher. In stark contrast, major US indices such as the Dow Jones Industrial Average, S&P 500 and Nasdaq all dropped below their respective 200-day moving averages.

Meanwhile, our preferred measure of US investor sentiment and volatility, the VIX, spiked to levels not seen since the summer of 2024 —a period now referred to as the "Great Carry Unwind”.^[10]

The worst-performing asset of all was the US dollar, which continued its broad-based selloff. In fact, if you are looking for a bearish indicator, the US Dollar Index has only had one worse start to a year in the past quarter of the century. And that year was? Yes, you’ve guessed it, 2008.

 

Past performance is not a reliable indicator of current or future results.

References

[1] CNN, ‘Trump imposes sweeping 25% steel and aluminium tariffs,’ March 12, 2025
[2] Associated Press, ‘Trump halts doubling of tariffs on Canadian metals after Ontario suspends electricity price hikes,’ March 12, 2025
[3] European Union, ‘Commission responds to unjustified US steel and aluminium tariffs with countermeasures,’ March 12, 2025
[4] Bloomberg, ‘Trump vows 200% tariff on EU wine, escalating trade tensions,’ March 13, 2025
[5] US Bureau of Labor Statistics, ‘CPI for all items rises 0.2% in February; shelter up, gasoline declines,’ March 12, 2025
[6] Politico, ‘Germany’s Merz secures breakthrough on gargantuan spending plan,’ March 14, 2025
[7] ECB, ‘A robust strategy for a new era,’ March 12, 2025
[8] Bloomberg, ‘World Interest Rate Policy,’ as of March 14, 2025
[9] Bloomberg, Bloomberg Galaxy Crypto Index, as of March 14, 2025
[10] CBOE, ‘Chicago Board Options Exchange Volatility Index,’ as of March 14, 2025

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co. are as of March 17, 2025, and may change without notice. All data figures are from Bloomberg, as of March 14, 2025, unless otherwise stated.

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