“Speak softly and carry a big stick”. That was the foreign policy advice that Theodore Roosevelt, the 26th President of the United States, gave to his diplomats. What he meant by it is rather clear: negotiate with other nations in a calm and polite way, but keep a credible use of economic or even military power resources available. His current successor, the 47th President of the US, does not really seem to have taken this advice to heart. Donald Trump insults his opponents with remarkable frequency. Professional politicians and diplomats are likely to add “in the line of duty” to that. The question for the markets is more how big and credible the President’s threatening trade language is. Bond and forex markets, meanwhile, were worried about the credibility of the “Big, beautiful bill,” the budget plan that Trump wants to steer through Congress, which most observers say is only widening the gaping hole in the budget. As if all of this were not nerve-racking enough, escalating tensions in the Middle East added another generous dash of uncertainty to the market cocktail. The markets have been on a real roller coaster in the 2nd quarter of 2025.
Liberation Day: The beginning of a turbulent trade saga
The quarter started with a bang: On 2 April 2025, according to Trump, it was “Liberation Day”. On that day, the president announced a list of “reciprocal” trade tariffs with almost all US trading partners. He argued that the tariffs were necessary in order to correct the unfair trade practices. The market observers who followed the announcement fell off their chairs in amazement. Not only did the tariff system prove very complex, with a different tariff for almost every country, the level of tariffs, in particular, stunned observers: they were much higher than even the biggest trading pessimist had predicted. China, which many see as the real target of Trump’s trade anger, was even slapped with a 125% tariff, making trade virtually impossible. The baffled markets didn’t need much time to pass judgment on Liberation Day: this package of measures would boost inflation and end growth, a combination that is detrimental to corporate profits. As a result, a sell-off wave rolled over the markets the next day. The baffled world leaders also reacted. Some condemned the tariffs, but stopped short of taking retaliatory measures. They speculated that this was the usual Trump method: putting a lot of pressure on the start of negotiations and then reaching a more balanced compromise. China did the opposite: Xi Jinping remained silent but raised tariffs on US products to 105%. After which an irritated Trump raised tariffs on Chinese products to 155%.
Boomerang effect
As politicians struggled, markets declined further and worried business leaders began calling their Congressmen and even the White House. They alerted the President that especially the high tariffs on Chinese products made trade virtually impossible. Almost immediately after the tariffs were announced, the shipping traffic departing from China to the US fell by 50%. The message from major retailers (Walmart, Target and Costco) to the White House was crystal clear: in a few weeks, the shelves in their stores would be empty and the president would be blamed. That turned out to be enough to get Trump over the line: he announced a 90-day pause before the tariffs would take effect. That allowed time for negotiations, and at least for the sharpest sides of the tariff discussion to be smoothed off. A certain sense of calm returned to the markets. The stock exchanges started to recover from the tariff episode. Justified or not? The future will tell.
Draft budget for second fissure
As if that weren’t enough, another story began in the meantime: the “Big, beautiful bill”, Trump’s and his administration’s budget plans. Once again, all the alarm bells sounded, now on the bond and forex markets. After all, Trump’s fiscal plans also met with little understanding in the markets. First, Trump wanted to make the tax cut he had implemented in 2018, and which in principle expires at the end of 2025, permanent. That would cost the Treasury an estimated USD 390 billion. On top of this, he wanted to implement a number of new tax cuts (including on corporate profits), which would be partly financed by savings on government operations and social programmes. Only it has since become clear that the Doge programme, headed by Elon Musk, is not achieving the announced savings (and Musk himself has since disappeared from the political scene). Research institutes point out that this budget plan will never be neutral and will ensure that already high public deficits and debts increase even more. Fun detail: those debts are supposed to be financed primarily by the same foreigners with whom Trump is fighting his trade war. No wonder that in the bond markets too, the turmoil grew in leaps and bounds. This turmoil was particularly noticeable in the rise in interest rates on long-term bonds.
The interest rate on the 30-year bond even rose to the symbolic 5% level at one point. And that is not good news for the US government. This year alone, it faces the task of refinancing some USD 7,000 billion in maturing bonds. Many of those maturing bonds were issued in the period of extremely low yields and now need to be refinanced at much higher interest rates. This means that interest costs for the US are set to rise, triggering the onset of the much-feared debt snowball effect. Foreigners therefore cautiously began to reduce their large positions in treasuries. In doing so, they also sold resulting dollar positions: for the first time, the USD’s dominance as a global reserve currency was questioned. This too has left us in a state of anxious waiting. The budget proposal was narrowly approved in the House of Representatives but seems to be facing more resistance than expected in the Senate, with some Republicans also making plenty of caveats about the deal. All that remains is to see how hot this budget soup, served at boiling point, will be when it finally ends up in our bowl.
Geopolitical situation
As well as these economic developments, the situation in the Middle East also began to escalate. American bombers bombed Iranian nuclear facilities at the last minute before we finished editing this newsletter. It remains to be seen how this story will unfold. Iran swears revenge , but seems very weakened and would have few actual options. But also in the Middle East a Pandora’s box seems to be opening, just like in Ukraine, where after more than 3 years of fighting there is still little prospect of a solution. The geopolitical situation seems to have only become more complex.
Conclusion
It goes without saying that all these events have had an impact on our management choices. In a climate riddled with uncertainties, we have reviewed the sensitivity of our positions to the trade uncertainties and made adjustments where necessary.
The third quarter of 2025 is already well underway, with both trade talks and US fiscal legislation expected to unwind. We continue to follow these developments with great alertness and flexibility of action and a defensive approach.
