Trade tariffs and geopolitical tensions

“Volatile quarter on the financial markets”

Looking back at the second quarter, these are the main developments:

The financial markets experienced a volatile quarter. The quarter was dominated primarily by U.S. trade tariffs. The uncertainty was reflected in the VIX index (the volatility index of the U.S. stock market), which rose from around 22 to more than 50 at the start of the quarter. The only times this century that the index was higher were at the peak of the “Global Financial Crisis” and during the outbreak of the coronavirus pandemic.
The quarter started dramatically for equities after the import tariffs announced on 2 April (a day President Trump had previously labelled “Liberation Day”) turned out to be much higher than expected. In the days following the announcement of these ‘reciprocal’ import tariffs, global equities plummeted, and stock market volatility surged.
The turning point came on 9 April, when Trump announced a 90-day suspension of the tariffs. This suspension applied only to countries that had not taken reciprocal measures. So it did not apply to China, which did take countermeasures. During this period, a universal tariff rate of 10% was in effect. As a result of the suspension, equities managed to recover a significant portion of their earlier losses in the following weeks. By the end of April, the volatility index had fallen back to around 25.
Positive market sentiment continued throughout the quarter as the United States concluded more trade deals. On 8 May, the U.S. and British governments reached an agreement. A few days later, import tariffs on Chinese goods dropped from 130% to 30%. In return, China lowered its tariffs on U.S. goods from 125% to 10%. In the last week of May, the previously announced import tariffs for the European Union were postponed until 9 July.
From mid-June, geopolitical tensions between Iran and Israel flared up again, with mutual airstrikes. Eventually, a ceasefire was reached following a U.S. strike on Iran’s nuclear facilities.
Better-than-expected macroeconomic data eased investor concerns about a sudden downturn in the U.S. economy and rapidly rising inflation.
The U.S. dollar weakened by over 7% against the euro.
The European Central Bank cut interest rates twice by 25 basis points. The U.S. Federal Reserve, in contrast, left rates unchanged. Trump criticised Fed Chair Powell for refusing to cut rates and threatened to fire him.
Long-term interest rates rose due to concerns about government deficits in the U.S., Japan, and Europe. Investors in U.S. bonds, for example, were worried that Trump’s “One Big Beautiful Bill” proposal would further increase the U.S. budget deficit.