Market IQ | Political and capital market insights

Q1 2025 was marked by a rise in divergence between sector and regional asset classes within equities and fixed income. Throughout the quarter, markets absorbed shocks caused by tariff uncertainty in the US and the continuation of monetary and fiscal policy narratives in Europe, China, and Japan. Uncertainty first rocked markets on February 1st, when US President Donald Trump signed an executive order imposing tariffs of at least 10% on China, Mexico, and Canada before announcing a delay on tariffs for Canada and Mexico days later. This negative news for US risk was in sharp contrast to the developments in Europe, where EU nations began discussing plans to reinvest in security for Europe and the ECB continued their easing cycle. Significant actions included a 25 basis-point cut from the ECB in early March as well as German debt reform and fiscal stimulus passed in mid-March that outlined plans for a defense and infrastructure fund that could reach as high as EUR 500bn. European equity markets rallied while US equity markets fell sharply. In Japan, the BOJ continued it’s historic monetary policy shift by raising it’s policy rate another 25 basis points to 0.5%. This move helped assuage investor fears and fueled cautious optimism in volatile Japanese markets as Japan continued its efforts to curb rising inflation, stimulate wage growth, and protect it’s export driven economy from currency pressures. In China, the government continued to announce robust fiscal stimulus measures to counter weak economic performance in 2024. Expanded infrastructure spending and targeted consumer subsidies were among the many introductions that were intended to help lift consumption and support key business sectors. Equity markets responded positively despite concerns of possible weakening of the yuan in the event of a trade conflict between China and the United States. Despite these positive developments, markets were more often jolted back and forth by President Trump’s sporadic announcements and withdrawals of tariffs on different US trade partners. The uncertainty was also felt during the US Fed’s FOMC meeting on March 18-19, where the Fed held rates and stressed that it would take a measured and data-dependent approach to policy adjustments in the near future.

Equity volatility remained elevated in Q1 2025, with all regions except the US and Japan posting gains. The MSCI All Country World Index returned -1.32% despite the positive developments in monetary and fiscal policy. In the US, the S&P 500 returned -4.27%, the Nasdaq 100 index returned -8.07%, and the Russell 2000 index returned -9.48%. US tech and small cap companies fell on the possible growth, inflation, and profitability impacts of developing Trump tariff policy. Internationally, the MSCI Emerging Markets Index returned a strong 2.93% behind Chinese monetary and fiscal stimulus as well as relative improvements in emerging markets manufacturing conditions compared to developed economies. The MSCI Europe Index led with a return of 10.48%, while the MSCI Japan index returned 0.34%.

Fixed income returns were positive, but sometimes volatile. For the quarter, the Bloomberg US Treasury Index returned 2.92%. The Bloomberg US Corporate Bond Index and the Bloomberg US High Yield returned 2.34% and 1%, respectively, as spreads widened due to pressures from tariff uncertainty and slowing US growth. Outside the US, the Bloomberg EM Hard Currency Index returned 2.56% while the Bloomberg Global Aggregate Index returned 2.64% despite negative performance from European bonds as a result of fiscal policy changes.