Full-blown trade war 'may have only just begun' as investors fear global growth slowdown in 2025

The unveiling of some savage tariffs from the Trump administration over the weekend has wreaked havoc in financial markets.

It is perhaps not the size of the trade levies that has caught markets wrong-footed, but both the hastiness at which they will be imposed and the speed of the retaliatory response from authorities in Canada and Mexico. We have on our hands a full-blown trade war and one that, worryingly, may have only just begun, with President Trump hinting that the EU will be next to feel the wrath of his tariff policies.

There appears to be no economic rationale for these trade restrictions, and the big fear for investors is that these tariffs could act to significantly weaken global growth in 2025.

This creates an extremely unpleasant environment for risk assets, and a favourable one for the dollar, particularly given the growing threat of higher Federal Reserve rates for longer.

European currencies have borne the brunt of the sell-off so far, as have emerging markets, particularly among those that are acutely exposed to external demand.

Sterling has held up reasonably well so far, given that Britain appears low on the list of targets for tariffs, is not exposed to global demand and runs a decent trade surplus with the US, which may help sidestep any trade restrictions.

The onus will be on the Labour government to strike a deal with President Trump, yet Keir Starmer will be in Brussels this week as he attempts to ‘reset’ the UK’s relationship with the EU - not ideal timing.”