The last month has seen a plethora of global geopolitical and economic events, many of them seeming unrelated. Below, we summarise some of the most relevant developments and their potential investment implications:
90 days later, but where are the 90 deals?
Approximately 90 days have passed since “Liberation Day” on the 2nd of April 2025, the day on which the main round of US tariffs went into effect. While most country-specific “reciprocal” tariffs have been paused (set to expire on 8th July 2025), the baseline 10% tariff remains active on most imports. So how has the US economy faired in the face of these tariffs?
There has been widespread debate whether it would be consumers or producers who shoulder the burden of paying the tariffs. So far it appears that non-US automakers, having chosen to cut their import prices, offsetting the impact of tariffs and in effect paying the tariff for the consumer – Figure 1, Panel B. However, as Figure 1, Panel A illustrates overall import prices have not fallen since the start of the trade war, and yet US inflation has not risen. Indicating that intermediary importers have largely absorbed the cost of tariffs.
Figure 1 – Except for automakers, import prices have not fallen
US based companies have understandably chosen not to raise prices given the weaker demand in the current macro-environment, and the potential for backlash from President Trump. Regardless, it is unlikely that importers can continue to bear the burden indefinitely, as Walmart and other companies have already noted. When they eventually do pass those costs on to consumers, inflation may follow.
Meanwhile Trump remains steadfast, and unless financial markets force his hand, he is unlikely to meaningfully cut tariffs himself. Despite the White House initiating a fast-track diplomatic campaign to negotiate “90 deals in 90 days”, the only trade deal that the Trump administration has managed to reach is an agreement with the UK, which is not even legally binding. Meanwhile, the US Department of Commerce has launched multiple Section 232 (a US law that allows the President to restrict or tariff imports of certain goods if the Secretary of Commerce determines that such imports threaten to impair national security) investigations into copper, lumber, semiconductors, pharmaceuticals and commercial aircraft. Many of which are likely to conclude in higher tariffs in those industries.
When and where to go overweight duration
At present, most market participants are expecting the Fed to implement three rate cuts of 0.25% each before year end. Extend the outlook to the next 12 months, and the market is discounting 1.2% of rate cuts. In contrast, we expect the Fed will likely reduce rates by 2.25% to the 2% level over this period. Even in a non-recessionary scenario, the Fed will likely cut rates one or two times as tariff induced inflation will probably be temporary. As Figure 2 below illustrates, if one expects the Fed to cut rates by more than what the market is discounting, a dovish surprise, then one should go overweight duration.
Figure 2 – Periods of dovish surprises typically coincide with excess returns
However, we would caution going overweight duration just yet, as a deluge of government debt issuances over the coming years will likely keep a floor under yields. In fact, higher yields may be the only metric preventing further growth in the budget deficit. Despite the above, treasury yields will probably still fall temporarily if a recession is confirmed. In which case going tactically long duration would make sense. Until that evidence emerges, we remain neutral on treasuries though.
As US Treasuries tend to be high beta, their yields typically move more widely than ex-US yields. Thus, if global growth does weaken, the higher beta of US treasuries should allow them to outperform the global government bond benchmark. Outside of the US, both Canada and the UK appear to be on the brink of a recession. In response, it is probable that their respective central banks will cut rates aggressively. Presenting both Canadian bonds and UK gilts as an attractive opportunity to go overweight in the onset of their economic slowdowns.
On the other end of the spectrum, we believe that Japanese government bonds are the most likely to underperform the global bond benchmark. That’s because despite Japanese yields steadily rising over the past three years, the 10-year JGB yield is still well below other major developed economies – see Figure 3. Combined with Japanese inflation expectations finally near the BoJ’s target, and it becomes quite unlikely that the BoJ will be able to cut rates significantly from here.
Figure 3 – JGB yields have risen, but remain well below other major economies
Wait, US exceptionalism does not apply to the US dollar?
As Figure 4 below depicts, the US dollar typically tracks the path of interest rate differentials. In other words, if US rates rise relative to foreign rates, then the dollar will strengthen, and vice versa. However, since Liberation Day, this relationship has broken down. Despite 5-year rate differentials moving 0.12% in the dollar’s favour, the US Dollar Index (“DXY”) instead continued to weaken, falling a further 5.9%.
Figure 4 – The DXY no longer tracks interest rate differentials
Clearly Trump’s trade policies have led to a weakened dollar as foreign demand for US bonds declines. The Treasury International Capital System’s records show that the major seller of US Treasuries and bonds has been China. Foreigners will likely continue to reduce exposure to US dollar-denominated assets in response to Trump’s trade policies. However, the dollar is still typically a countercyclical currency and thus will likely stabilise and maybe even strengthen modestly if global growth weakens in the near term.
From oil shock to oil glut
Just over a week ago the global economy was at risk of a major oil shock. Goldman Sachs had warned that if Iran closed the Strait of Hormuz, oil could spike to $110 per barrel, with markets pricing in a ~31% probability of closure. For now, the immediate risk of a major oil shock has been neutralised, and even the threat of all-out war in the Middle East has dissipated.
While the risk of further oil shocks is not zero, we believe the main driver of oil prices going forward will be the trajectory of the global economy. In a recessionary scenario, we expect that Brent oil prices will fall to about $50 per barrel, but doubt that Brent will sink much below that level as the current breakeven price for US shale producers is $65 per barrel. Since November US rig count has fallen 5%, and any major lasting price decline would lead to a more material drop in US production, putting a floor under prices – see Figure 5.
Figure 5 – In a recession oil prices are unlikely to fall below $50 per barrel
Investment takeaway
90 days later and Trump’s “Liberation Day” tariffs have had numerous effects on global business. From 1st order impacts, leading to producers and importers temporarily absorbing tariffs, to 2nd order impacts like foreign investors selling US denominated assets and placing downward pressure on the US dollar. Meanwhile, we remain cautious of a slowing global economy and are watching closely for sings to go overweight duration and turn even more underweight risk assets.
If you are interested in finding out more about how cognisance of the macroeconomic backdrop impacts our investment decision making process, connect with Integrity Asset Management and let us help you navigate your investing journey.
For more information on this synopsis or to discuss solutions provided by Integrity Asset Management, please contact us at:
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Source: Bloomberg, 30 June 2025