Uncertainty is the refuge of hope – Henri-Frédéric

Market index returns

Week to date since March 19, 2025 as of March 26, 2025

Index definitions: Global Real Estate = FTSE EPRA/NAREIT Developed Index; Global Infrastructure = Dow Jones Brookfield Global Infrastructure Index; Natural Resource Equities = S&P Global Natural Resources Index; Commodity Futures = Bloomberg Commodity Index; TIPS = Barclays US TIPS Index; Global Equities = MSCI World Index; Real Assets Index = 30% FTSE EPRA/NAREIT Developed Index, 30% Dow Jones Brookfield Global Infrastructure Index; 15% S&P Global Natural Resources Index; 15% Bloomberg Commodity Index, 10% Barclays TIPS Index. Source: Bloomberg, DWS. Past performance is not indicative of future results. It is not possible to invest directly in an index.

All eyes are on the U.S. as we inch closer to what President Trump has coined ‘liberation day’ for American trade on April 2. Despite the near daily dose of tariff news-flow, markets remain gripped by anxiety over the ultimate scale of the tariffs and their economic impact. The plan centers on so-called "reciprocal tariffs,” designed to match or exceed the duties other nations place on U.S. goods. The expectation is for April 2 to bring a sweeping new wave of country-specific tariff announcements, coupled with possible sector-specific actions. To the extent that April 2 will offer some clarity, we’ll have to wait and see. However, it’s unlikely to end there with an extended period of negotiations and concessions to follow. Whatever the final form, we do know talk about tariffs has already crimped confidence among U.S. consumers and companies, while central bankers remain on watch for signs of higher inflation and weaker growth – a challenging combination.

In the interim, amidst a vacuum of uncertainty, global equity markets have remained vulnerable to the slightest tariff development. The past week (period ending March 26, 2025) was no exception as the shifting stance on U.S. trade sanctions drove capital market direction. We saw one of the best trading sessions of the year on March 24th, as President Trump signaled trading partners would receive possible exemptions or reductions, only for markets to reverse course on March 26th after Trump slapped 25% tariffs on car imports to the U.S. Markets are likely to remain choppy as policy uncertainty lingers. In this environment Global Equities eked out a minor gain for the period. The Real Assets Index slightly lagged Global Equities, dragged down by weakness from Natural Resource Equities and Commodity Futures. Elsewhere, Global Real Estate matched Global Equities, recording a minor gain. Global Infrastructure was flat and U.S. Treasury Inflation-Protected Securities (TIPS), marginally negative. Among other indicators we track, the VIX, an index of expected S&P volatility, fell 8% to 18.3. The VIX closed the period in line with the year-to-date average (18.4), and modestly above the 1-year run rate (16.6). The long end of the yield curve moved higher, with 10- & 30-year yields up over 10 basis points (bps), while 2-year yields saw a more modest uptick.  Inflation break-evens moved higher, up 7 bps for the 5-year and 4 bps for the 10-year segment. Credit spreads, the yield premium over sovereign base rates, tightened 7 bps for high yield credits and widened 1 bp for investment-grade (IG) spreads. For the period, the dollar was slightly firmer, ending at 104.55 as measured by the DXY index. Oil prices strengthened to $69.65 per barrel, and gold prices slipped but still held above the high $3,000 per ounce mark.^[1]

Why it matters: Facing disruption in financial markets, trade flows, and corporate revenues, investors need to stay on their toes to factor in new information and potential outcomes. We continue to monitor the hard data, but also investor expectations and sentiment, as views and beliefs can translate into actual price activity, which can become actionable and eventually revealed in the hard data.

Macro Dive: We review the latest PMIs, check the pulse of the U.S. consumer, and highlight a big spending package out of Germany.

• A mixed bag (PMIs):  Flash PMI data compiled by S&P Global Market Intelligence presented a mixed bag as output growth ticked higher in March, while confidence dimmed. The Output Index tracks monthly changes in actual factory production and equivalent gauges of service sector activity. In the U.S. we saw a surprise acceleration in private-sector output growth, driven by a welcome upturn in services sector activity. The U.S. composite output index rose to a three-month high of 53.5 this month, up from 51.6 in February. The 50-point mark separates expansion from contraction. Despite an improvement in output among service providers, the outlook deteriorated, with sentiment about prospects over the coming year sliding to the second lowest level since 2022. "Firms’ costs are rising at the steepest rate for nearly two years, driven by higher tariffs, labor costs, and federal spending cuts, with manufacturers passing these higher costs onto customers,” Bloomberg summarized. In Europe, the European Purchasing Manager Indices (PMI) came in slightly better than expected, confirming a slight upward slope. In contrast, Japan reported the first fall in output since last October, while manufacturing confidence and services sentiment also weakened.^[2]

• Data Watch (U.S. consumer):  Consumer sentiment surveys have been dismal as of late, and the latest release from the Conference Board proved no exception. Consumer confidence fell to the lowest level since January 2021 and expectations for the future slumped to a 12-year low. The Conference Board’s gauge of U.S. consumer confidence decreased 7.2 points to 92.9, data released Tuesday showed. The figure was worse than economists’ expectations. A measure of expectations for the next six months dropped nearly 10 points to 65.2. Meanwhile, a key gauge of present conditions declined more modestly. Sentiment continues to be buffeted by economic and policy concerns. Until there is more clarity on the tariffs (and in turn economic front), confidence amongst U.S. consumers is likely to remain fragile.^[3]

• Turning Point (German Sondervermögen – funding infrastructure and defense):  The Germany’s defense and infrastructure sectors are getting a major boost. On March 21st, Germany’s upper house approved constitutional changes, paving the way for a significant increase in defense and infrastructure spending. A €500 billion special fund will be created to finance infrastructure projects, and will lie outside the ordinary budget, while defense spending above 1% of Germany's gross domestic product is effectively exempt from the country's "debt brake," The announcements mark a significant shift in Germany fiscal regime after decades of conservatism. Gaining the necessary consensus for this deal was no easy feat. To achieve the required two-thirds majority, the potential future coalition partners the Social Democrats (SPD) and the Christian Democrats (CDU/CSU) had to get the Greens on board, no tricky undertaking after the potential future chancellor Friedrich Merz announced the plan. In the preliminary discussions, the Greens successfully fixed the purpose of the funding to Germany’s 2045 net zero targets. The investment plan will predominantly include the following infrastructure sectors: civil protection and civil defense, transportation, social infrastructure, energy infrastructure, R&D, and digital infrastructure.^[4]

Real Assets, Real Insights: This week we will look at the London Office market, lessons the UK learned from the recent outage at Heathrow Airport, and Donald Trump’s latest executive order, aimed at expanding domestic production of critical minerals.

• London office – A leader or laggard? (Real Estate):  The answer is both…as the divergence between submarkets grows. In our latest house view, DWS identified the London City submarket as the European office market expected to enjoy the strongest prime rent growth over the coming five years. Whilst this may appear upbeat for the UK capital, towards the very bottom of the pack sits London’s Docklands submarket. Location matters more than ever. In the post-Covid environment companies are gravitating towards well-connected submarkets with strong amenities and after-work entertainment. This trend has undoubtedly strengthened the traditional "core" markets such as London City where office take-up in 2024 was nearly 20% higher than pre-COVID averages, and pre-letting is at an all-time high. Docklands on the other hand is grappling with high vacancy and declining rents, as the exodus of major firms such as HSBC (back to London city) dented its reputation as a financial center. Beyond the traditional core, newer office submarkets such as Kings Cross and Farringdon have emerged as notable success stories, appealing to the tech and creative sectors. Both submarkets stand out for their strong transport links and vibrant mixed-use environments. As the DWS research team concludes, while asset quality remains key, submarket selection is paramount. Well-located assets, even if not considered "best-in-class" should continue to thrive. In weaker locations, however, even Grade A offices face challenges.5 To learn more about DWS’s return outlook over the next decade check out our recent paper here: DWS Real Estate Research | A Tale of Two Cities: London’s Office Divide.^[5]

• Your flight to LHR got cancelled (Infrastructure):  In the early hours of March 21st, Heathrow Airport (London) ground to a halt after a fire at a nearby electricity substation knocked out power to Europe’s busiest airport. The blaze forced inbound flights to divert to other hubs or return to their original airports. Around 1,300 flights were cancelled and questions about the resilience of UK’s infrastructure were raised. Heathrow’s management has been challenged, with questions over the length of the shutdown and whether sections of the airport could have reopened earlier. Heathrow’s chief executive Thomas Woldbye said the grid outage and its consequences were the major issue. National Grid, the owner and operator of Britain’s transmission networks (including the substations around Heathrow airport) defended itself by stating, “Two substations were always available for the distribution network companies and Heathrow to take power.” John Pettigrew, National Grid’s CEO added, “Losing a substation is a unique event — but there were two others available. So that is a level of resilience.” In response, the government has ordered a six-week investigation into the shutdown led by the National Energy System Operator. Regardless of the results, it’s clear the UK needs  a solid plan to protect their critical infrastructure and invest to make it more resilient.^[6]

• Mission critical (Commodities):  U.S. President Donald Trump invoked emergency powers to expand domestic production of critical minerals (and potentially coal) as he tries to reduce reliance on foreign imports.  The executive order, which taps Cold War era legislation (the Defense Production Act is a 1950s law), instructs government agencies, including the defense department, to prioritize mining projects as well as providing technical and financial support to boost critical mineral production. The order also encourages faster permitting for mining and processing projects. Despite having some critical mineral deposits, the U.S. relies heavily on other countries for its supplies, creating economic and security risks, according to the White House. Last year, Beijing banned the sale of some critical minerals to the United States, forcing American firms to look for other sources of the vital materials. Critical minerals are seen as crucial to energy and security as they are essential to the production of key technologies such as power grids, batteries, and defense (advanced weapons) systems. Trump has also been eager to gain access to Ukraine's critical minerals. U.S. President Trump has also talked about taking over the semi-autonomous Danish territory of Greenland, which is rich in rare earths.^[7]