Liberation day has dampened any positive expectations about the near-term future. Risk markets have gapped lower, with energy and risk-sensitive currencies also having declined, while safe haven assets like gold and fixed income have performed well exhibiting strong negative correlations.

This aligns with the Trump administration’s emphasis on ‘’short-term pain for long-term gain.’’ The Trump team is revitalised by victories in Florida’s congressional elections, filling seats vacated of Mike Waltz (who became Trump’s national security adviser), and Matt Gaetz, who was initially selected as attorney general but later withdrew amid torrid personal misconduct allegations.  

This improves the GOP margins by 2 seats in the House of Representatives (now 220-213) until the midterm elections of 2026.  Therefore, we should anticipate that further adjustments in the global order will continue by executive order and with congressional approval, likely causing further turbulence for all asset valuations forcing sizeable recalibrations by markets.

For diversified investors, the negative correlation between equities and bonds is evident again worldwide. While US equities have suffered and US bonds have rallied, year to date we have seen mirror images in Europe and China, where bonds have sold-off as equities have rallied, until today’s broader risk-off sentiment, which has boosted defensive assets.

The US president’s highly anticipated tariff announcement was more aggressive than markets expected in aggregate. Asian nations face significantly higher tariffs, European trade partners saw measures largely in line with expectations, and North America getting off lightly. Final details are still unclear, but starting April 5, there will be a 10% minimum tariff on all goods imported into the USA. From April 9, tariffs will increase further on countries with which the US has the largest trade deficits.

For example, tariffs will rise to 20% on the EU, 24% on Japan, and 34% on China, pushing China’s average tariff rate to 54%. That’s sure to drive up prices at retailers such as Walmart, complicating efforts to support a slowing economy.

The US Federal Reserve Board may struggle to justify rate cuts if inflation spikes in Q2 and Q3 due to these one-off price increases, even though they are not expected to create sustained inflationary pressure.

We know that fiscal policy under Trump is expected to be highly contractionary, as Bessent and his team work to reduce the deficit to a 3% level, all whilst delivering expected tax cuts which still require substantial funding.

The tariff announcement ‘’should’’ raise around $400 billion in revenue, or about 1.3% of GDP, which would be the largest tax increase in over 50 years, borne by the consumer. Higher prices will also see real disposable incomes stagnate, which may bring the economy close to recession.  We will need to wait and see what may come of retaliatory measures, as US trading partners consider today's changes and how they may respond.

Does this ignite a ‘credit cycle’ after the darling period of returns for fixed income credit investors given high government bonds yields combined with ongoing credit spread performance/tightening?  

It is certainly possible, the danger for this market always resides in the fact that it lies in natural long positioning, making active asset allocation away from the asset class quite challenging to recycle without market impact, as the over-the-counter dealers are already long on the product and unlikely willing to add risk given the weakening macro backdrop. If equity volatility calms down then credit valuations can hold, but it is certainly worth considering all the permutations and combinations on this one.

‍US Investment Grade Credit spreads starting to move wider after long period of performance

For Australia, slowing global growth with a focus on higher tariffs on Asian nations, our major trading partners, are likely push the reluctant RBA toward rate cuts, albeit at a slow pace. Unlike the proactive RBNZ, the RBA tends to react only once data confirms that the economy is rapidly cooling. With domestic inflation easing and unemployment held steady by shifts in the participation rate, markets anticipate a rate cut in May. Given the long lags in monetary policy, this could well mark the start of a series of cuts through to year-end.

For investors, the evolving macro landscape presents both challenges and opportunities. Elevated market volatility, shifting trade dynamics, and tighter fiscal policies are likely to create headwinds for risk assets, while defensive sectors and safe-haven investments could continue to benefit.