Market Reacts to Trump Tariffs: State Street's Altaf Kassam on Growth, Inflation, and European Markets

Market's Slow Realization of Tariff Impact

• 📉 Global stocks have fallen sharply as investors brace for US tariffs, with European shares hitting a two-month low.
• 💡 Investors initially viewed tariffs as a negotiation tactic, not literal policy, leading the market to "catch up" with the reality of President Trump's promises.
• ⚠️ The approaching "Liberation Day" on Wednesday is seen as a catalyst for the market to price in the potential for widespread tariffs.

Economic Impact: Growth and Inflation Outlook

• 📈 While a recession is considered "far-fetched," there will be a definite impact on growth and inflation.
• 📊 State Street has revised growth numbers down and inflation numbers up, but still sees a long way to go before a US recession.
• 🌍 Positive contributing factors from Europe and China suggest the global economic picture may not be as dire as feared.

Investment Positioning and European Markets

• 🇪🇺 Trades like "Make Europe Great Again" and European defense stocks have already seen significant movement, with limited room for further gains.
• 💰 Short-term strength may be seen in the Euro, but structural problems and weak growth in Europe could lead to fading this trend in the second half of the year.
• 🇩🇪 Germany's fiscal debt break release is a positive factor for the Euro in the short term.

European Bonds and Credit Markets

• 📈 European bonds are becoming more attractive due to higher yields compared to the recent past of zero or negative rates.
• 🏦 Investors are more comfortable with German debt issuance, less so with France and the UK.
• 🔀 A rebalance is expected, with money potentially moving out of US Treasuries into European government bonds and investment-grade credit.