Market Review 17th March 2025

Everything you need to know, Simplified!

Markets last week

Summary

• Markets extended their slide, with the US now in correction territory, down over 10% from January highs as trade tensions and recession fears intensified

• The sell-off reflects growing recognition that US President Trump’s trade agenda is a structural shift, aiming to rebalance trade, weaken the dollar and reshore manufacturing

• A key contradiction looms: tariffs are argued to be non-inflationary due to dollar strength, yet the administration also wants a weaker dollar - this tension is fuelling inflation risks

• Consumer sentiment is deteriorating, with the University of Michigan index down 22% since December, reflecting rising uncertainty over policy, inflation, and job security

• The US Federal Reserve (Fed) is stuck between inflation risks and market expectations for cuts; with tariffs set to make an impact and retaliation risks growing, policymakers are likely to hold rates steady

• Trump’s market priorities have shifted: whereas equities were the focus in his first term, now it's the 10-year treasury yield - volatility may be acceptable collateral damage for this administration

• The Fed is expected to hold rates on Wednesday, but markets are watching for a more hawkish dot plot and higher inflation forecasts in its quarterly economic projections

• The Bank of England (BoE) is likely to hold at 4.5% on Thursday, with policymakers treading carefully as inflation ticks higher and tax hikes feed through.

  
  

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Market Review

Stability remains elusive

Markets continued their downward trajectory last week as trade tensions and recession concerns dominated investor sentiment. Equities struggled across the board, with major indices extending their losing streaks. The US continues to lead the decline, falling 2.4% in sterling terms. The US market has fallen into correction territory declining by over 10% from its peak in mid-January. Markets have seen corrections before and they often present buying opportunities for long-term investors; although volatility remains high, some sectors and defensive assets are holding up well.

The sell-off has been driven by escalating uncertainty around the Trump administration’s aggressive trade policy, which is increasingly seen as a structural shift rather than mere posturing.

The administration’s push to ‘Restructure the Global Trading System’ is aimed at addressing perceived imbalances stemming from the dollar’s global reserve status. The plan hinges on a combination of tariffs to boost revenue, policies to weaken the dollar and incentives to reshore manufacturing.

The administration argues tariffs won’t fuel inflation since a stronger dollar offsets price hikes, but at the same time, it wants a weaker dollar to boost exports. This inherent contradiction raises inflation risks. They can’t have both and markets are taking notice.

So are consumers as the University of Michigan’s Consumer Sentiment index fell 11% in March, marking a 22% decline for the year so far. Confidence indicators have now dropped for three consecutive months, as uncertainty around economic policy, inflation and labour markets continues to rise. Some notable analysts argue that the sentiment indicator leans left which should be factored into the decline since Trump took office.

The Fed faces a delicate balancing act, while rate cuts are still being priced in, the persistence of inflation risks will force policymakers to hold if core measures fail to decline meaningfully. With tariffs set to take effect over the coming months and global retaliation risks mounting, uncertainty remains the dominant theme.

Investors are coming to terms with the reality that market-friendly policies may not be a priority for the White House this time around. Whereas the equity market was Trump’s litmus test during his first administration, the 10-year treasury yield is the test for his second and equity volatility may be necessary collateral damage for this administration. In a world of shifting geopolitical and economic fault lines, stability remains elusive.

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The week ahead

Wednesday: Fed rate decision

Our thoughts: The Fed is expected to keep rates on hold, but attention will be on the quarterly Summary of Economic Projections, which could reveal any shifts in the Federal Open Market Committee outlook. With inflation expectations climbing, analysts anticipate a more hawkish dot plot and upward revisions to inflation forecasts.

Thursday: BoE rate decision

Our thoughts: The BoE is likely to hold rates at 4.5%, the Monetary Policy Committee are moving cautiously amid geopolitical uncertainty, rising inflation, and upcoming tax increases -such as higher National Insurance contributions - which are expected to add further inflationary pressure. The committee are likely to maintain its guidance that “a gradual and careful approach to the further withdrawal of monetary policy restraint is appropriate”.

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