Investment Outlook: The US president is for turning

President Donald Trump’s partial rollback of protectionist measures highlights his willingness to reverse course to ease financial market turmoil. However, asset allocators now face a challenging landscape shaped by US-China tensions, recession risks, and dollar depreciation. Amidst this uncertainty, investors are seeking refuge in alternative assets like gold.

When tariffs meet treasuries

For those with long enough memories, Margaret Thatcher made the iconic, “the lady’s not for turning” quote in a speech on 10 October 1980 at the Conservative Party Conference in Brighton. This phrase from the former British Prime Minister was a defiant declaration of her commitment to free-market principles and tight monetary policy to reduce inflation, despite criticism and calls for a change in direction. 

The same cannot be said for President Donald Trump during the first 100 days of his second term. Just a week after announcing sharp import tariff hikes on all US trading partners on 2 April, dubbed “Liberation Day,” he partially reversed course. Trump declared a 90-day pause on the “reciprocal” tariffs while maintaining the 10% baseline universal tariff rate. However, China was excluded from the pause and the US now has a 145% tariff on goods imported from China, while China has responded with a 125% tariff rate on US products entering its borders.

While US and global stocks sold off sharply in early April, it was probably extreme bond market volatility that triggered Trump to give a reprieve on some of his protectionist measures. In April, the 30-year Treasury bond yield rose past 5% (intraday), up from 4.5% in its largest weekly change since 1987.¹ Such a jump in government yields raises investor concerns over the stability and liquidity of the Treasury market (like the gilt debacle under Liz Truss’ brief premiership in September-October 2022). The bottom line is that the president appears unwilling to risk disorderly financial markets. 

Nevertheless, US trade protectionism is a wake-up call for multinationals. They must now consider their supply-chains and where products are manufactured to avoid being priced out of the market. Furthermore, central bankers need to balance the impact of tariffs on growth and inflation when setting interest rates. Such uncertainty is likely to remain a source of volatility for some time. We see three key areas for investors to watch out for.

1. The US-China trade war morphs into a financial war

Trump has singled out China for higher tariffs. It seems he is trying to stymie China’s global economic influence by encouraging other countries to shift their supply chains away from China. Ideally, Trump wants multinationals to establish more factories in the US.  

The risk for investors is that China uses its hoard of Treasuries as a financial weapon against the US in response to tariffs. Officially, as of January, China owns $760 billion of Treasury securities across all maturities, making it the second-largest foreign creditor after Japan.² However, China owns more Treasuries held through intermediaries. One example is Belgium’s Euroclear system, a major international clearing house for securities, where it provides anonymity to allow countries to discreetly manage their holdings and avoid direct scrutiny of their transactions. 

Essentially, China could challenge the US by selling Treasuries in markets where trading volumes are relatively low. The daily trading volume of the 30-year US Treasury bond is typically around $20 billion, which is low compared to $300 billion for the 10-year maturity.³ Investors will be cognisant that rising bond yields could undermine confidence in the equity market.

2. US stocks have yet to price in a recession

Trade tariffs, the crackdown on immigration, and austerity measures from the Department of Government Efficiency have all contributed to heightened economic risks. Recent survey data — such as consumer sentiment and business confidence — have weakened. If this trend continues long enough, then an economic downturn could become unavoidable. 

So far, the US labour market has remained resilient, helping to counterbalance these risks. The timely initial jobless claims data are stable and show no sign that the unemployment rate is about to spike — typically a signal of an impending recession. Thankfully, record high corporate profit margins are a useful cushion to absorb rising costs from tariffs and relocating production. This reduces the need to cut employment materially.   

However, the probability of a recession has risen, presenting a source of downside risk for equity investors. According to JPMorgan's analysis of historical data spanning the past century, the average S&P 500 correction during recessions has been around 35%⁴. This compares to a maximum 18.9% decline since its peak on February 19 at the closing day price⁵.

3. Sharp US dollar depreciation adds to market uncertainty

Unlike previous equity market sell-offs, the US dollar has depreciated this year. It has not been a safe-haven asset this time around. This is probably due to diminished trust in the Trump administration, which has prompted investors to move capital away from the US.

Further, nations are now looking to explore and expand trade relationships beyond the US, even including those with historic rivalries. For instance, trade ministers from China, South Korea, and Japan met for the first time in five years at the end of March to accelerate trilateral free trade agreement talks. Elsewhere, the EU has been actively diversifying its trading partners. After 25 years of negotiations, the EU agreed to a deal with the Mercosur bloc (Argentina, Brazil, Paraguay and Uruguay) in December, signed a new free trade agreement with Mexico in January, and plans a similar deal with India by the end of the year.

Put simply, a line has been crossed where countries are now incentivised to diversify their trading relationships away from the States. Over the medium term this could reduce demand for the US dollar as a transaction currency.

Trump has also been vocal in criticising the Federal Reserve (Fed) Chair, Jerome Powell, for not lowering interest rates as aggressively as he would like. The tension between them has fuelled uncertainty around the Fed's independence from the government. Trump’s comments have further reduced investor confidence in the US, dragging down the greenback in the process.

What's next for markets amid tariff uncertainty? 

Markets are volatile and this creates opportunities and risks for investors. Arguably, events from April show that Trump is prepared to row back on his protectionist agenda to create a platform for stocks to recover from the sell-off. Fundamentally, investors will be paying close attention to how the turmoil plays out in company earnings over the coming months to assess the trajectory of stocks. 

Nevertheless, US-China tensions, the economic outlook and uncertainty over currencies are all risks to watch out for. Expect plenty of volatility, which increases the importance of diversification. 

To mitigate risks investors have turned to gold bullion. The ongoing rise in the gold price is testament to the fact that central banks continue to buy the yellow metal amid declining trust in the US dollar as a store of value and fears of financial sanctions applied by Western governments following the Russian invasion of Ukraine. 

Moreover, US dollar depreciation increases demand for bullion as it becomes cheaper due to it being denominated in US dollars. Unlike the US president who may reverse gears on his policies, it does seem that there is little to turn investors away from gold in this current uncertain environment. 

Sources

1. MSN, Treasury yields are surging despite market chaos, April 2025
2. LSEG, Evelyn Partners
3. SIFMA, US Treasury Securities Statistics, April 2025
4. JPM, Are markets out of the wood after recent wild ride? April 2025
5. LSEG, Evelyn Partners