Trump’s tariff policy and trade tensions cause market declines. Elevated trade uncertainty continued to dent business confidence and investor sentiment. Fears of a US recession eroded the American exceptionalism narrative in early March. The Atlanta Fed’s GDPNow model flagged that US GDP growth would turn negative in 1Q25, driven by a significant widening of the country’s trade deficit. As a result, the Dow Jones and NASDAQ indices lost 3.1% and 2.4% respectively. Similarly, the STOXX Europe 600 fell by 1.2% amid negative sentiments regarding US trade policy. This week, all eyes are on the upcoming Federal Open Market Committee (FOMC) meeting where the Fed is widely expected to hold rates constant against a challenging backdrop of growth concerns and somewhat sticky inflation.

Asia ex-Japan equities continued to rise due to expectations of further Chinese government stimulus. The SHCOMP and CSI 300 Index increased 1.4% and 1.6% respectively. Japan equities rose modestly with the Nikkei 225 Index rising by 0.4%. This rise was due to the weakening of the yen which provided a tailwind for Japanese exporters.

Topic in focus: Europe defence sector to benefit from strained transatlantic ties. Europe’s defence stocks have been on a tear amid rising geopolitical unease following Trump’s inauguration in January this year. The expectation that Europe will have to increase military spending and shoulder more of their own defence burden have investors betting on a resurgence in the sector. The STOXX Europe aerospace & defence index has increased by almost 35% on a YTD basis amid tense negotiations between Ukraine President Volodymyr Zelensky and US President Donald Trump. European leaders are now under immense pressure to boost defence spending in the wake of what many are calling a new paradigm under Trump—where US security guarantees are becoming increasingly scarce—to deter any future moves by Russia. To that end, Germany’s incoming chancellor, Friedrich Merz, has announced a deal to increase the country’s debt headroom to allow a boom in military spending.

Incidentally, many of the companies that are riding this new defence tailwind are also expected beneficiaries of the space economy theme—a topic we highlighted in 2H24. Companies such as Thales (HO FP) and BAE (BA LN) systems, which have rallied 80.4% and 44.3% respectively on a YTD basis, are also exposed to growth drivers in the form of increasing demand for satellite positioning, navigation & timing, and earth observation. The combined tailwinds of rising military spending as well as secular growth in the space economy bodes well for the European defence sector moving forward.

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