Considerable unrest due to DeepSeek AI and trade tariffs

Looking back at the first quarter, these were the main developments:

• In late January, the launch of DeepSeek, a new Chinese AI chatbot, led to unrest on the financial markets.  According to many, DeepSeek is on a par with ChatGPT. It uses significantly less computing power and requires less powerful chips. Its launch has raised doubts about whether the high valuations of major tech companies are justified.
• Over the course of the quarter, investors grew increasingly concerned about the negative impact of trade tariffs on the global economy. They were afraid that higher import duties would lead to higher inflation and slower economic growth. President Trump announced import tariffs on products from Canada (25%, with the exception of oil at 10%), Mexico (25%), and China (20%). A 25% tax was also imposed on the import of steel and aluminium. On 2 April 2025 - referred to in advance as “Liberation Day” - President Trump confirmed that a reciprocal import tariff would be introduced. In principle, this means that each country trading with the US would be subject to a different tariff.
• The uncertainty surrounding these trade tariffs has significantly undermined the confidence of US consumers and producers. In addition, inflation expectations rose sharply.
• The US Federal Reserve left its policy rate unchanged this quarter at 4.25%-4.5%.  However, the European Central Bank (ECB) cut interest rates twice by 25 basis points, bringing rates down to 2.5%.
• It was a bad quarter for European sovereign bonds. European yields rose sharply in response to expectations that European governments will significantly increase defence spending as there is a growing awareness that the region can no longer rely on the United States to guarantee its security. In Germany, the new coalition of CDU/CSU and SPD, with the support of the Greens, announced plans to significantly increase spending on infrastructure and defence in the coming years. The relaxation of Germany’s debt brake will free up more room for defence spending. Additionally, € 500 billion will be allocated to German infrastructure.
• European equities outperformed US equities this quarter, driven by the fiscal stimulus plans of European governments. In the US, equities were hit hard by DeepSeek and the uncertainty surrounding the impact of trade tariffs on the US economy.