Global Markets Reel in a Quarter Marked by Trade War and Growth Concerns

Markets are closing out a turbulent quarter with little relief as investors grapple with heightened fears of stagflation and escalating trade tensions driven by former President Donald Trump’s aggressive tariff policies.

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The uncertainty has led to a broad risk-off sentiment, pushing global equities toward their worst quarterly performance since September 2023 while fueling demand for safe-haven assets such as government bonds and gold.

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Stocks across Asia saw significant losses on Monday, contributing to the broader selloff in global markets. In response, a Bloomberg index tracking U.S. government bonds has climbed 2.6% so far this year, reflecting increased investor interest in safer assets. Meanwhile, gold prices have continued their upward trajectory, repeatedly setting new record highs.

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Faced with an intensifying trade war and concerns about a sharp slowdown in U.S. economic growth, global money managers are either reducing exposure to risky assets or adjusting their portfolios.

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Economist Ed Yardeni has raised the probability of a stagflationary environment to 45%, cautioning that the U.S. economy could slide into recession. He has assigned similar odds to a more pronounced stock market downturn, underscoring the growing unease among investors.

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Hopes that Trump’s tariff plans would be limited in scope were dashed on April 2 when he stated that reciprocal duties would target “all countries,” rather than select trading partners. This announcement compounded economic worries, particularly after recent data showed a sharp decline in U.S. consumer sentiment, sluggish spending, and rising inflation. These indicators suggest that the administration’s trade policies could have broader economic consequences.

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“The expectations surrounding Trump 2.0’s aggressive tariff agenda have forced us to reassess our previously bullish outlook,” Yardeni wrote in a note to clients. “It has also undermined confidence in the U.S. economy, affecting sentiment among corporate executives, consumers, and investors alike.”

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The deteriorating outlook has weakened the U.S. dollar’s appeal as a safe-haven currency, reversing the trend of U.S. exceptionalism that had buoyed the greenback in recent years.

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Instead, investors have shifted toward alternative currencies, such as the euro, on expectations of increased government spending in Europe. The Japanese yen has also gained ground after the Bank of Japan signaled its intention to continue tightening monetary policy.

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Meanwhile, the weaker dollar has provided support for emerging-market assets, allowing them to outperform.

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Amid these developments, Goldman Sachs economists now predict that both the Federal Reserve and the European Central Bank will implement three interest rate cuts each this year. The expected policy shifts come as trade restrictions threaten to weigh on economic momentum, prompting central banks to adopt a more accommodative stance.

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While some investors are actively reducing risk exposure ahead of the anticipated tariff announcements, others see an opportunity to reenter the market, particularly if the trade measures prove to be less severe than expected or if negotiations indicate a potential resolution to the prolonged tariff disputes. Some strategists believe there is room for investor sentiment to improve in the coming quarter.

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“We anticipate that any rebound in risk assets in the coming weeks will be tied to positive developments—whether that means tariffs turning out to be less damaging than feared or delays due to ongoing negotiations,” said Bob Savage, head of markets macro strategy at BNY in New York. “The significant risk-off sentiment in the first quarter sets the stage for a potential short-term recovery.”

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