Message from our CIO: Stock markets fall amid trade war

Financial markets continue to react negatively to the punitive tariffs announced by Donald Trump last Wednesday. And the announcement of retaliatory measures by China on Friday has obviously not helped to reassure investors. With the exception of government bonds from the most reliable countries and, to a lesser extent, gold, all financial assets have suffered heavy losses since the American president's conference, with declines being more pronounced on riskier assets such as stocks. Major stock exchanges have recorded declines of more than 10% over the two to three sessions that followed. A correction among the sharpest in recent history over such a short period. And since the peaks recorded a few weeks ago, the decline is around 20% on most financial markets, a threshold beyond which a bear market is considered. This sharp increase in investors' risk aversion is linked to the economic risks now weighing on the American economy and the global situation.

In our opinion, a recession scenario is not yet assured. It will depend on the implementation of the measures announced by Donald Trump and especially on the outcome of bilateral negotiations that will take place over the coming weeks. It is said that more than fifty countries have requested the United States to open such negotiations. Rate cuts are also looming on the side of central banks. Certainly, the American Federal Reserve is currently worried about a surge in inflation related to these new taxes. But it should not remain insensitive in case of a clear deterioration in the job market. Especially since other major central banks should cut their rates, starting with the European Central Bank. A fiscal stimulus is also expected, at least in the countries most exposed to this trade war. We are thinking particularly of China.

The volatility of financial markets could continue in the short term. However, we believe that the markets are already integrating a lot of bad news and that a very bleak economic scenario is now anticipated by investors. The most used sentiment indicators as well as measures of implied volatility on stock exchanges indicate a level of pessimism rarely observed and a capitulation of investors. The history of financial markets shows that it is usually wise to remain calm in such a context. Positive catalysts could also gradually help to restore investor confidence. The recent history of Donald Trump in terms of tariff implementation leaves a slim hope of a postponement of the reciprocal taxes to be applied on April 9. Moreover, the conclusion of initial tariff reduction agreements by some countries could revive the hope of a gradual and relatively widespread reduction of these taxes over the coming months.