During March, the dominant US market was increasingly volatile was the centre of significant selling, continuing on from falls in late February. Concerns around the health of the US economy and erratic tariff policies continue to concern investors, who are struggling to price these risks. Outside the US, European equities have been boosted by potentially significant increases in defence spending and overall government investment in Germany. However, policy volatility, mainly on tariffs, has impacted business and consumer confidence and some signs of stress are now being seen in retail sales. Given the direction of economic momentum, combined with greater uncertainty on trade, there is a realistic risk of recession in the world’s largest economy.
Developments in the Ukraine conflict have been less positive than hoped, although the prospect for peace increasing as the US is forcing discussion. The potential for peace has already impacted energy prices in Europe as the prospect for Russian gas exports returning could ease supply pressures. A potentially bigger and longer term impact of the way the negotiations have been conducted is how European (and other) nations perceive the established US alliance framework and guarantees. The current administration has forced European nations to take their own defence into their own hands. The shift in mindset has been rapid and the scale of the change will be significant for many European nations. In particular, Germany, which has underspent for many years and has significant fiscal headroom, is likely to see a seismic shift in the amount of defence spending over the coming years. Markets have taken this positively as investors see a potential renaissance in European manufacturing. Some barriers remain, however, several stars appear to be aligning for the European economy.
Elsewhere in markets, there has been surprisingly little movement in fixed income. Given economic and equity market concerns, investors would naturally be expected to “flee” into safer government bonds and avoid credit markets. However, there has been no notable shift in government bond yields and no significant change in credit spreads. This suggests there could be something different in the way the equity and fixed income markets are viewing the current situation. Furthermore, it could be that safe haven seeking investors are more comfortable buying other assets, such as Gold, which has repeatedly reached all time highs over recent months. Growing concerns over the sustainability of government spending and current debt levels is increasingly referenced and is not isolated to an individual country. Nevertheless, the fall in equity markets has moderated stretched valuations and should the economic and political concerns prove unfounded, recent selling could provide a reasonable entry point. However, there are clearly increased risks which should rightfully be reflected in investors’ risk appetite.
