Jun 24, 2025

IC No. 41 - Wolf without sheep's clothing

What could have been interpreted as a belated April Fool's joke now feels like a bad dream. The turbulence on the markets caused by Trump was historic in its speed and magnitude and led to the strongest 3-day market reaction of the S&P 500 Index since the 1987 stock market crash.

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It seems that Trump cannot operate without drama. The market was expecting a more moderate stance in the tariffs dispute and was surprised by the maximum demands from the US. What may work for a property deal in New York is a disaster on the world stage - also for the credibility of the Americans. The leader of the free world is unabashedly showing himself to be a wolf without sheep's clothing. Trump is all about power and the redistribution of resources. The US, a global power that feels cornered, is defending itself against the world and in particular against China as a rival. What Trump is doing with his ‘bull in a china shop’ policy and the Europeans are missing out on in their slumber, the Chinese are skilfully playing off. Their influence in the world continues to grow.

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It goes on to discuss how dependent a sovereign state should be on imports. The USA imports 30% of the essential active ingredients for medicines from China.^[1] 88% of global semiconductor production is located outside the USA.^[2] And up to 90% of rare earths are sourced from China.^[3] After decades of globalisation, supply chains are closely interwoven.

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After the maximum demands, a further escalation with China does not seem to be in sight for the time being (but neither do the solutions). On the other hand, the first results of negotiations with other countries will gradually leak out. Good news that the markets absolutely need. So, there is hope that the markets will bottom out. However, if uncertainties persist for a longer period of time, this can quickly be crushed, as the first quarterly reports from companies suggest. The probability that profit forecasts for the current financial year will be revised downwards is increasing. Uncertainty is poison for companies and the markets.

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Market participants are also discussing whether Trump is deliberately trying to cause a recession in order to force the US Federal Reserve to cut interest rates. The issue is the need to refinance the USA's high mountain of debt. USD 9,000 billion is due for refinancing by the end of the year.^[4] One percentage point difference in interest rates equates to an annual interest burden of USD 90 billion. It remains to be seen whether this calculation will work out. At present, the risk premia for US debt appear to be driving the yield curve.

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Another intended measure of the tariff war declared by the USA is the weakening of the US dollar. It is the Americans who accuse many countries around the world of currency manipulation.^[5] In a way, this is an ironic situation, as the US itself is a beneficiary of the USD reserve currency and does not seem to shy away from allowing its currency to depreciate sharply.

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A more defensive stance is currently called for. Increased liquidity and gold as a reliable anchor - equities as much as the risk budget allows in the current market phase. In addition to the tariff war and its effects, investors should keep an eye on the recession risk in the US in particular.

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Dr. Patrick Cettier

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^[1] American hospital association, February 2025

^[2] Semiconductor Industry Association (SIA), 2024

^[3] World bank

^[4] U.S. Treasury Monthly Statement of the Public Debt (MSPD), March 2025

^[5] Reuters, 04.03.2025

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