Donald Trump's latest U-turn
Last week marked the best performance of the year for the S&P 500 index. However, this rebound must be seen in the context of the index having officially entered a "bear market" (a decline of more than 20 % from the February peak).
This pause was triggered by a new reversal from President Trump regarding the implementation of import tariffs. Instead of the exorbitant figures announced on April 2, a 10 % tax will now be applied to imports from all countries except China, which remains subject to a steep 145 % rate.
This 90-day truce is expected to allow for a series of negotiations, which will hopefully result in far more reasonable tariffs. It will also give analysts an opportunity to focus on the current earnings season, which is projected to see corporate profits grow by 7 % in the first quarter.
Enough to reassure investors in the current climate of extreme pessimism? That will likely depend on President Trump's next tweets.
The dollar, a weapon of trade war?
Shifts in the political landscape have reshuffled the cards in the foreign exchange market, at least for the two main reserve currencies: the dollar and the euro. The European currency has regained strength since the beginning of the year. Berlin’s decision to abandon the debt brake and the EU’s push for rearmament are expected to lead to fiscal spending amounting to several hundred billion euros over the coming years. This should significantly bolster the region’s economic outlook and inflation expectations.
But it is mainly in Washington that political developments have shaken the currency markets. The US dollar has been a collateral casualty of the reciprocal tariff announcements by Donald Trump. Within just ten days, the greenback lost nearly 8% against the euro. This drop is even more unusual given that it occurred amid plunging equity markets and a flight to quality, a context that typically supports the US currency.
The dollar appears to be suffering from investors’ growing scepticism toward all US-based assets. Moreover, the lack of any official response from the US administration suggests that Washington is tolerating, or even encouraging, this depreciation. Like rising import tariffs, a weaker dollar contributes to improving the competitiveness of US industry, even if it risks reigniting inflation for American households.
This downward trend could continue. Key support levels have been breached against several currencies, including the euro and the Swiss franc. These levels have also broken on the closely watched Dollar Index, which tracks the dollar’s performance against major global currencies.
In this deteriorating fundamental and technical environment, we have decided to significantly reduce dollar exposure in our portfolios. For example, in a balanced portfolio denominated in Swiss francs, the dollar allocation has been reduced from 18 % to 13 % (-5 %).
This week's figure: 3’245 USD/Oz
Gold hits new all-time highs. After a brief dip at the onset of the tariff uncertainty saga, gold quickly rebounded. It is benefiting from expectations of a decoupling between the United States and the rest of the world, as well as from the weakness of the US dollar. Moreover, gold is reaffirming its status as a safe-haven asset in a context of heightened uncertainty.
Author
-
Daniel Varela holds a degree in business administration with a specialisation in finance from the University of Geneva and began his career in 1989 as a fixed income manager. He joined Banque Piguet & Cie in 1999 as head of institutional asset management and with responsibility for bond analysis and management. In 2011, he became head of the investment strategy and Piguet Galland's investment department. In 2012, he joined Piguet Galland's Executive Committee as CIO.
