Markets waiting for sunnier days

A very complicated month of March has ended on the financial markets, which suffered from fears of a trade war threatened by US President Donald Trump.

While there were already signs of hesitation in February, March proved decisive in the loss of risk appetite. The performance in euros of -7,5% on the equity indices speaks for itself.

Investors lost confidence and visibility in the period that loomed before the spectre of “Liberation Day” on 2 April, when Trump promised to apply “reciprocal tariffs.”

At the same time, the US 10-year rate ended the month at 4,20%. In Europe, movements on the German 10-year rate were rather sharp: after rising in the first half of the month due to the announcement of investment plans, financed by new debt issues, they then fell following economic fears related to customs duties. Thus, the 10-year yield rose from 2,40% to more than 2,80% in a few days before returning to a downward trajectory.

In the meantime, published economic figures should be taken with a pinch of salt: strong employment, inflation and economic activity figures reflect only past economic conditions. However, the environment in recent weeks has been one of deteriorating confidence, whether for households or businesses, in contrast to economic data that has not yet adapted to the new conditions.

In short, this loss of visibility and confidence made a clean sweep of the economic forecasts that were in force at the beginning of the year. Take the example of the United States, where growth was expected to exceed 2% at the beginning of the year. The gradual erosion of these forecasts in the current environment is now giving way to stagflation (economic stagnation combined with inflation) and even recession scenarios. Similarly, lingering doubts may override the slight recovery expected in Europe (nearly 1% growth was anticipated at the beginning of the year), since part of this growth is likely to disappear, particularly due to risks surrounding exports to the United States.

In conclusion, as the abovementioned economic risks are not fully discounted by the stock market indices, the equity allocation has moved from overweight to underweight, with a reduction in sensitivity to the economy. The Consumer Discretionary and Financial sectors were also downgraded. With European rates rising and recession risks increasing, duration was extended via German bonds. Finally, the recommendation on High Yield moved to underweight, particularly via the US bucket.

The month of March was marked by high volatility on the equity markets, mainly fuelled by the continuing uncertainties triggered by the global trade war and the US tariff policy.

The S&P 500, dragged down by trade tensions, fell significantly over the month and even hit six-month lows. 

In Europe, the change in the German fiscal framework with the approval of a stimulus plan for infrastructure and defence was not enough to offset the uncertainties weighing on the markets. 

In addition, several quarterly results from key companies such as Marvell, Fedex and Nike disappointed, adding to concerns about economic growth.

Caution is still warranted in the Basic Materials and Energy sectors, which are affected by uncertainties around global demand. The European Real Estate sector remains attractive, as does the Communications Services sector, both in terms of the telecommunications segment and the technology segment that is more sensitive to developments in AI. It is clear that a lack of consumer confidence and economic uncertainties are putting the performance of real data at risk. The allocation to the Consumer Discretionary and US banks sectors was also neutralised.

In March, the trajectories of US and European sovereign rates were very different. In the US, the 10-year yield remained relatively stable, hovering around 4,20%. By contrast, in Europe, yields rose sharply: the German 10-year rate rose from 2,40% to 2,73% at the end of the month, even temporarily exceeding 2,90%.

This movement is largely explained by a major fiscal turnaround in Germany. The future governing coalition has proposed a reform of the “debt brake” enshrined in the Constitution, in order to increase defence spending and create a €500 billion infrastructure fund. The effect of this announcement on rates was immediate, triggering the biggest daily rise in the 10-year Bund yield since German reunification in 1990: +0,30% on 5 March alone.

In the US, trade tensions weighed on the market. The tariffs already announced, as well as those expected in early April, have fuelled economic uncertainty. Concerned investors revised their growth expectations downwards, as fears of persistent or even re-accelerating inflation were revived.

Finally, in the credit market, concerns about growth trends weighed on high yield bonds. Companies issuing these securities, which are often more cyclical and highly indebted, are more sensitive to an economic slowdown and tighter financial conditions, which explains their underperformance over the month.