Historic session in international markets. With stock markets trying to assimilate the violent protectionist shift by the United States, the retaliation announced by China fuels the theory of a global trade war leading to a recession. Thus, although the new tariffs have not yet taken effect and tough negotiations are expected, investors have hit the panic button as a precaution. After Wall Street suffered its worst session in five years on Thursday, the losses continued on Friday with drops of 5%, extending the collapse to 10% in just two sessions. This tension was also not helped by the words of Federal Reserve Chairman Jerome Powell, who acknowledged that the economic effects of the tariffs will be"significantly greater" than expected and will translate into lower growth and higher inflation.
Volatility is at its peak, and no market is safe, not even the Ibex 35, which on Thursday managed to avoid the heavy losses of others. It closed Friday's session with a 5.83% drop, a decline comparable only to historic moments such as the outbreak of the pandemic (-14%), the Brexit victory (-12%), the collapse of Lehman Brothers, or the worst days of the euro crisis. These are the only occasions in the century on which the Ibex has fallen so sharply. The European stock market, which in March experienced its particular moment of glory due to expectations of stronger economic growth, is infected by pessimism. The German Dax fell 4.65%; the Euro Stoxx 50, 4.6%; the French Cac, 4.3%; and the British FTSE, 5%. These losses are greatest in highly bank-intensive indices such as the Italian Mib (-6.53%) and the Ibex 35. The European financial sector, which played in favor of the Spanish market on Thursday, collapsed by 8.4% on Friday.
The shock has been felt across all markets: commodities, currencies, and debt. As investors sold stocks, they accelerated their purchases of safer assets such as bonds and gold. Fears of an economic slowdown are weighing on Brent, which fell to $65, its lowest level since April 2021, while the euro consolidated its position at 1.09 greenbacks.
The stock market declines on Friday were widespread, and although no Ibex stock escaped the falls, the worst of it was suffered by banks. Banks, which at the start of the year had exceeded the most optimistic forecasts with the help of record results and improved dividends, are now being weighed down by expectations of lower growth and further rate cuts, which are penalizing margins (the difference between what they charge for loans and what they pay for deposits). Sabadell lost 10.97%, BBVA fell 9.37%, Santander fell 8.77%; Unicaja fell 10.56%, CaixaBank fell 10.3%, and Bankinter fell 9.31%. Bank of America analysts are urging calm and recommending an underweight position in cyclical stocks such as the financial sector. However, investors have sold before asking, and index-tracking strategies have extended the decline: not even companies with predictable income and attractive dividend yields such as Redeia (-2.39%), Enagás (-2.56%) or Iberdrola (-3.57%) escaped the fire.
Overreaction
UBS analysts acknowledge that the tariffs are much worse than expected, but believe the reaction of recent days is exaggerated."The key is to decide whether the tariffs are ideological or a bargaining chip," they emphasize. The Swiss bank believes there is room for tariffs to be softened because trading partners have their own negotiating leverage. These include holdings of government debt (foreigners hold 24% of US government debt), Chinese control of rare earths and other strategic materials, and the possibility of alternative trading blocs forming:"The US represents only 15% of world trade," they add. But they also warn:"If the tariffs are ideological, then we could find ourselves in the worst-case scenario, which cannot be ruled out."
While waiting to see how the talks develop, analyst firms are beginning to adjust their forecasts and significantly reduce their growth estimates. With tariffs on the table, economists at Generali Investment are lowering their US GDP forecasts to 1.5%, lower than the 1.7% expansion the Fed predicted in its latest projections. The dreaded word"stagflation" (persistent low growth and inflation) is once again being heard loudly.
These recession expectations have overshadowed the strength shown by the labor market in March. Before the scope of the tariffs was known, the US economy created 228,000 jobs, above the 150,000 analysts had expected."Given the uncertainty about where the economy is headed and with so many companies having to figure out what this new environment means for them, we see little risk of positive changes materializing in the labor market," ING notes.
Mark Haefele, chief investment officer for UBS Global WM, believes the economic slowdown will not be exclusive to the US."We believe European growth will also slow," he says. The prospects for lower growth are rekindling expectations of rate cuts. Unlike in the US, where inflation remains persistent even before the tariff package was approved, prices in the eurozone continue to show signs of moderation: in March, the rate in the eurozone fell to 2.2%. In other words, the ECB has no reason to lower the price of money. Citi analysts believe the ECB should revise its growth outlook downward."Even with the prospect of increased fiscal spending and spending from Germany and Europe in the coming years, a data-dependent central bank should find plenty of reasons to continue cutting interest rates," they add. Experts believe the debate that has emerged over whether to pause at the next meeting is inconsistent with the accumulation of negative news.
As investors accelerate their stock sales, they rush to buy debt, pushing up prices and lowering yields. The movement is widespread on both sides of the Atlantic: the US 10-year bond is balancing at 4%, and the German 10-year benchmark is falling to 2.58%, approaching levels prior to the announcement of Germany's fiscal plan, a program that triggered the largest increase in German bond rates since the fall of the Berlin Wall. Meanwhile, gold, which had reached historic highs in recent weeks due to geopolitical fears, fell 2.6% but remained above $3,000.
The slower growth outlook is also reflected in commodities. OPEC+'s 411 billion barrels per day increase in supply, combined with an economic slowdown, has caused Brent crude to fall 6.5% to $65, the lowest level seen in April 2021 when the economy remained paralyzed."If current tariffs remain in place, a recession in the second or third quarter, as well as a bear market, is quite possible," says David Bahnsen, chief investment officer at The Bahnsen Group.
The poster with which Donald Trump detailed the tariffs applied to his main trading partners on Wednesday, supposedly the day of liberation, unleashed a historic financial storm, in addition to signaling a tectonic shift in the global economy. Investors have gone from caution to a feeling close to hysteria. Analysts advise arming themselves with patience because months of arduous negotiations lie ahead to prevent the economy from derailing. But stock market traders prefer to wait after selling.
