What does Friedrich Merz's 'Whatever it takes' mean for bonds?
Geopolitical and trade woes caused a lot of turmoil in the stock market in recent months. But what does Friedrich Merz's 'Whatever it takes' mean for bonds? Mark Van Assche, account manager Private Banking and Wealth Office, talks to David Willems, senior investment strategist at KBC Asset Management.
02/04/2025
Economy
- The American consumer is pivotal to the economic dynamism of the US. The trade war is creating a huge amount of uncertainty and forcing consumers to make increasingly difficult choices about whether to adjust or delay their purchases.
- In Europe, although additional public spending on defence and infrastructure appears to be bolstering optimism about growth, it is only expected to have an impact on economic growth in 2026-27, whereas the launch of import tariffs on European products in the US will have an immediate and negative impact.
Commodity prices - inflation
- Inflation in both the US and Europe is currently being driven by stubborn but not accelerating core inflation (especially in the service sector). Even so, it is widely believed that global inflation will increase again due to Trump’s policies (as a result of planned import tariffs and the impact of stricter migration policies on the labour market).
- However, the speed at which higher tariffs will be reflected in rising inflation remains uncertain. One thing is certain and that is inflation is currently moving in the right direction.
Fiscal and monetary policy
- Trump is planning new tax cuts under his leadership and is even toying with the idea of eliminating income taxes. However, the extent to which his tariff plans can compensate for this remains to be seen.
- China also continues to regularly support its flagging economy through new policy decisions.
- In the euro area, the major investments announced for defence and infrastructure are gradually taking more concrete shape.
- Both the Fed and the ECB have been lowering their key rates for some time now. In March, the ECB cut its key rate by 25 basis points. It is widely expected that the Fed will still ease its key rate further this year, but the extent to which higher inflation (due to the announced import tariffs) will prevent it from slashing interest rates if the economy falters remains to be seen.
Bond markets
- The bond markets are also in the grip of the trade war and expect economic growth to be negatively impacted. As a result, yields are falling on both German and American sovereign bonds.
Equity markets
- Investors are concerned about the impact of the announced import tariffs on company earnings.
- Apart from its level, this concern has also been prompted by the lack of clarity surrounding the announcement. Will the tariffs actually go into effect? Will America’s trading partners take countermeasures? Are negotiations still possible with the Trump administration?
- Trump remains non-committal about making adjustments. All this is creating uncertainty and that’s exactly what the stock markets don’t like.
Risks
- The conflict in the Middle East and Ukraine could continue to cause nervousness.
- As far as what will happen to the aid to Ukraine, Trump's policy decisions could certainly have a big impact. As a result, volatility has increased markedly.
- Lastly, Chinese AI technology may throw a spanner in the works due to the fact that DeepSeek has achieved impressive results at a fraction of what it costs in the West.
Shares are being scaled back given that the possibility of a slowdown in global growth has increased after a new barrage of trade tariffs
Siegfried top, Senior Investment Strategist KBC Asset Management
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