As we enter the final innings of a remarkable first quarter in global financial markets that can only be described as chaotic, one can only hope that a brief pause for breath is soon around the corner, although somehow the feeling is this could well be wishful thinking! The onslaught of daily social media announcements and executive orders from President Trump, jaw dropping scenes with Ukraine’s President Zelenskyy from the Oval Office, and monumental US (and now European) policy shifts, have combined to bamboozle investors and take the steam out of the equity bull market. What started as a growth re-pricing from a high valuation starting point, is now morphing into an economic growth scare driven by tariffs, DOGE, AI ambiguity, and now a growing perceived willingness of the US administration to embrace near-term economic pain and boardroom uncertainty in order to transition the economy for long-term gain. In short, just like he did with his first salvo of tariffs and trade wars in 2018, President Trump is making America guess again with his chaotic approach to policy implementation and brazen use of foghorn diplomacy.

Despite the threat of US tariffs, many markets made steady gains in February, helped by a last-minute tariff extension for Canada and Mexico and subsequent relief rally. The S&P 500 managed to reach another all-time high on February 19, but towards the end of the month a more risk-off tone developed as tariffs came back on the agenda alongside some weaker economic data out of the US. That hit the Magnificent 7 in particular, which posted their worst month since December 2022, and dragged down US equities more broadly. Nevertheless, it wasn’t all bad news, with European equities continuing their outperformance, and the move towards safe haven assets such as sovereign bonds and gold continued to support gains in these asset classes.

In Europe, a huge political shift was set in motion when Friedrich Merz, who is expected to become Germany’s next chancellor, said in response to the US withdrawing military aid and support for Ukraine: “In view of the threats to our freedom and peace on our continent, the rule for our defence now has to be whatever it takes”. The new defence proposal recommends that necessary defence spending above 1% of GDP should be exempt from debt brake restrictions, with no upper limit. European equities rallied strongly on the prospect of increased fiscal stimulus and investment, further contributing to the underperformance of US markets over the last three months as the most severe such streak in a decade. The S&P 500 has now trailed the Euro Stoxx 50 by 14% between December and February, but this has so far only put a small dent into the ~150% outperformance of US versus European equity markets over the past 15 years.

Offshore Chinese equities have enjoyed one of their best starts of the year in history, with the Hang Seng Index gaining 14.4% year-to-date, and outperforming world equities by 11.8%. A few factors have helped lift the market, notably the optimism around the positive AI narrative shift of China technology, the confirmation of a pro-growth policy bias at the ongoing Two Sessions policy meeting, and arguably more benign US-China relations so far under the new US administration than were previously feared by investors.