​In early April 2025, President Trump reignited trade tensions with sweeping tariffs - 10% on all imports and up to 50% for countries with "unfair" practices, hitting China hardest at 145%. China retaliated with up to 125% tariffs, blacklisting US firms and restricting exports of rare earths. Facing global backlash, Trump announced a 90-day delay for most countries (excluding China) and eased tariffs on key sectors like tech and pharma. Markets, initially hopeful over pro-business policies, turned volatile as concerns over aggressive trade moves mounted. The VIX spiked to 60 on Liberation Day - levels not seen since 2008 and 2020. Upon the delay of the tariff implementation, volatility eased quickly, as shown in Figure 1. Volatility levels have dropped to below 25, which is only slightly elevated compared to historical levels.

​Last week, President Donald Trump reignited global trade tensions by continuing his tariff policy. During “Liberation Day,” the President announced a sweeping plan, imposing a baseline 10% tariff on all imports and sharply escalating tariffs on countries deemed to have unfair trade practices. For those countries, tariffs of up to 50% were announced. China was hit hardest, with tariffs reaching as high as 145%. While many countries chose to limit retaliatory measures and instead focus on reaching an agreement with the US, China imposed matching tariffs of up to 125% on US products, blacklisted several American companies, and restricted exports of key materials. The latter includes rare earth metals, which are crucial in today’s world as they are vital for many technological products. In response to global backlash, Trump announced a 90-day delay on the tariff increases for most countries (excluding China), attempting to contain diplomatic fallout while maintaining a tough stance on trade imbalances. Amid further concerns that tariffs on key growth-spurring sectors such as technology and pharma could backfire, the administration announced additional reprieve by limiting tariffs on such critical goods.

​After peaking inflation in the US in 2021 and 2022, inflation decreased in 2023 to below 4% in the summer and steadily hovered between 3% and 4% until summer 2024. At the time, US inflation fell below 3% for the time in years and followed an optimistic trend to as low as 2.4%, before inflation started to pick up again October 2024. Since then, inflation steadily rose to 2.9% in December 2024. While the development overall is promising, the most recent trend is worrying, as interest rates remain at high levels.
To combat inflation, the Federal Reserve increased interest rates aggressively to as high as 5.25% - 5.5% until late 2023. Initially, cuts were expected by spring 2024. Eventually, the Federal Reserve started cutting interest rates aggressively in autumn 2024. By the end of 2024, US interest rates are between 4.25% and 4.5%. Originally, cuts in the same magnitudes were expected for 2025. These expectations were crushed by Powell in the Fed’s December meeting, in which he suggested that there will only be two 25bps rates cuts throughout 2025. With inflation expected to remain between 2% and 3%, the US labour market will mark an important decision maker for the Federal Reserve for their short-term interest rate policy. Additionally, Trump is another unknown, as he is a strong advocate for lowering rates sooner rather than later. However, while he can influence a lot, it is unlikely that his view will have an impact on the monetary policy, especially as it is virtually impossible for him to replace Powell as Chair of the Federal Reserve. Powell also proved in their meeting at the end of January 2025 that he is not swayed that easily, when the Fed decided to hold interest rates at current level. Figure 1 shows the development of inflation and interest rates in the US, the Euro zone, and the UK from 2023 to January 2025.

​The year 2025 did not start well for financial markets. With a positive outlook for the first time in the post-Covid era, optimism was justifiably high. While only two weeks do not provide much information for the whole of 2025, they do show a relatively low level of confidence among market participants. The outlook for 2025 is based on improving market conditions in most areas. Reasonable inflation and still historically strong labour markets provide a solid foundation. The change of leadership in the US is also expected to improve the business environment. In addition to government support, central banks will cut interest rates, providing further support to businesses. Geopolitical tensions, which significantly increased volatility last year, are also expected to improve. It is important to note that these are only a few examples that point to a strong 2025.
This is a stark comparison to the outlooks of previous years. Since Covid-19, almost every year has seen outlooks with almost apocalyptic consequences, especially around potential recessions. Perhaps it is precisely this overall positive outlook that makes the negative news shine more brightly. In this sense, any disappointment could send markets tumbling. Part of the recent decline in markets was triggered by the Fed's latest rate cut, in which the Fed stated that they would cut rates less than initially expected. Another factor was higher than expected US inflation data. This led to a general sell-off in risky assets, such as cryptocurrencies and equities, as shown in Figure 1. The impact on the performance of Bitcoin and the S&P500 has so far been limited due to a slight correction in mid to late December.