US equities tumbled and the Dollar weakened sharply as uncertainty around US trade policy continued to weigh on global financial markets. The S&P 500 fell -5.6% in sterling terms during the week as the Trump administration announced a series of delays and exemptions to the previously revealed 25% tariffs on Canadian and Mexican imports. While this suggests compromises may be found before the countries of North America enter a full-blown trade war, the continued change and lack of certainty hit investor sentiment. Outgoing Canadian prime minister Justin Trudeau indicated that Canada would not back down if President Trump continued to escalate tensions, a sentiment echoed by his replacement, former Bank of England governor Mark Carney. Carney had fighting words as he spoke to supporters following his successful party leadership campaign: “Americans should make no mistake: in trade, as in hockey, Canada will win”.

European equities continued to enjoy a strong run of performance, with the MSCI Europe ex UK index rising 1.6% in sterling terms during the week. In a reference to Mario Draghi’s famous 2012 speech on the Eurozone crisis, in which he stated the ECB would do “whatever it takes” to preserve the euro, incoming chancellor Friedrich Merz announced a deal to raise hundreds of billions of euros in additional infrastructure and defence spending: “In view of the threats to our freedom and peace on our continent, the rule of our defence now has to be ‘whatever it takes’”. The key features of the proposal are a new $500bn fund to repair Germany’s aging infrastructure and the loosening of stringent fiscal rules – known as the debt brake – on spending related to defence. German 10-year bund yields surged to over 2.8%, having been at 2.4% at the beginning of the month. The German DAX is up 14.9% year to date (local currency), one of the top performing markets in the world.

Further support for European markets came from the ECB, which cut its policy rate by 25bps to 2.5%. ECB President Lagarde stated that rates were now meaningfully less restrictive but noted that the potential trade war with the US had created phenomenal uncertainty. In Japan, the Nikkei 225 fell -1.2% in sterling terms, as the 10-year government bond yield jumped from 1.37% to 1.52%, its highest level since 2008, as strong wage growth and persistent inflation bolstered the case for the timing of the Bank of Japan’s next interest rate hike to be brought forward. In the UK, the FTSE 100 fell -1.5% on the week, with the FTSE All Share declining -1.4%.
 

Week Ahead

Source: Forex Factory, 10/03/25

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