Bassanese Bites: Shell shocked – February 24 2025
Global markets
Global equities retreated last week under a barrage of further announcements by US President Trump as well as early signs that his actions may be starting to negatively affect the economy.
There was little in the way of major US economic data last week, leaving Trump open to continue to dominate the headlines. His labelling of Ukrainian President Volodymyr Zelenskyy a “dictator” unnerved markets a little, as did Friday’s surprise announcement of 25% tariffs on cars, pharmaceuticals, and computer chips.
This comes after earlier plans to levy 25% tariffs on Canada and Mexico (which have since been postponed), a 10% additional tariff on China (still going ahead), tariffs on steel and aluminium (though exemptions are possible) and so-called “reciprocal tariffs” in early April after the White House reviews the trade restrictions imposed on the United States. Confused? You’re not the only one!
There is also now evidence that Trump’s various threats are starting to hurt the economy. Last Friday’s University of Michigan consumer sentiment survey showed a slump due to a rise in inflation fears.
Meanwhile, US Vice President JD Vance delivered a speech in Europe telling the continent’s leaders that it needs to beef up its own defences. This contributed to a further rally in defence stocks which, perhaps sadly, is now emerging as a new “Trump trade”. Those interested in the defence theme may want to look at our ARMR ETF.
While in Europe, Germany’s weekend election saw the conservative CDU party win the most votes (29%) as expected. This means its leader, Friedrich Merz, will become the next Chancellor once he has assembled a workable coalition. The ruling SPD party (under outgoing Chancellor Olaf Scholz) garnered only 16% of the vote while the Green took 12%.
And although it attained the second highest vote count (20%), the far right ‘Alternative for Germany’ (AfD), Merz says that party won’t be invited into the coalition. This means he’ll likely need to partner up with at least the SPD and possibly also the Greens.
For markets, the key issue now is whether the new governing coalition will ditch or loosen the legislative barrier to increased government spending – known as the “debt brake” – which limits new government borrowing each year to no more than 0.35% of GDP.
With relatively low public debt of 65% of GDP (at least by European standards) and a spluttering economy, markets would like to see more German fiscal stimulus. Although, for historic and demographic reasons, it likely will remain cautious in taking on more debt. Apart from stimulating the economy, Germany also faces the challenge of likely needing to boost defence spending in coming years.
All that said, the prospect of German fiscal stimulus, further ECB rate cuts, and a possible end to the Ukraine conflict are helping support European stocks, which have been outperforming global markets so far this year.
In other news, the Reserve Bank of New Zealand cut rates by 0.5% as widely expected, taking the cash rate to 3.75%. With growth weak and inflation back in the 1-3% target band, further rate cuts this year remain highly likely. The RBNZ itself is projecting a year-end cash rate of 3.1%.
Global week ahead
Apart from further Trump announcements, a key market focus this week will be the January US private consumption expenditure deflator (PCED). The PCED is the Fed’s preferred measure of inflation.
