Market Compass April 2025

Highlights:

• If fully implemented and followed by retaliation, the sanctions announced by the Trump administration would create a self-inflicted stagflation shock for the US economy and severely constrain growth in the Euro Area.
• We expect the Fed to look through the shock to the price level and act quickly to prevent recession. We now expect three rate cuts. We also increase to three the cuts the ECB will implement.
• Hopes of a short-term de-escalation are limited, but are more balanced medium term, especially as the 2026 US mid-term elections approach.
• Rising recession fears should support fixed income assets relative to equity (for which we further reduce overweight), we particularly like Investment Grade (IG) credit. Euro Area spreads should be well behaved as the bulk of the fiscal and military efforts are born by Germany. Neutral duration in Euro Area bonds, small long position in the US.

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