Markets Adjust to Major Political Shift as Global Trade Dynamics and Economic Policies Evolve

2025 has been a year of significant upheaval in global markets, driven by a major political shift that’s challenging the long-standing consensus that shaped Western economic policies for decades. From DeepSeek’s disruption of the artificial intelligence narrative to Germany’s shift in defence and infrastructure spending, and President Trump’s policies surrounding “Liberation Day”, markets have been forced to react to new realities.

The Rejection of a Long-standing Political Consensus

For years, Western economic policy was defined by a blend of fiscal rectitude, loose monetary policy, and globalization. However, by the 2010s, as interest rates hit zero and wage growth stagnated, it became clear that this model was failing for many people in Western democracies. This failure has paved the way for a new, populist political consensus that focuses on proactive fiscal policy, protectionism, and anti-immigration sentiments.

This shift in global politics is creating a seismic impact on financial markets. While this may appear chaotic, it is actually part of a broader trend we’ve discussed before: the rejection of the previous political regime that led to globalization and financial strategies built on low rates and high debt.

Trump’s Trade Policies and Tariff Impact

One of the most notable developments has been President Trump’s stance on international trade. His policies, particularly around tariffs, have raised eyebrows. While some of his economic framework is seen as flawed, his position on trade remains consistent and clear. Trump’s approach to tariffs — imposing them based on a country’s trade deficit with the US — provides a starting point for negotiations. It’s a framework that markets can now begin to analyze and price in, despite initial uncertainty.

“Markets hate uncertainty, and while we may not agree with his framework, at least we now understand the rules of the game,” said a financial analyst commenting on Trump’s tariff approach.

Trump’s trade policies, particularly the higher-than-expected tariffs, have forced companies to re-evaluate their supply chains, adjusting forecasts downwards and raising the risk of recession.

The Global Response and Economic Forecasts

The reactions of global powers, particularly China and European countries, will be critical in determining the course of markets. Countries are now making decisions on whether to retaliate and escalate the trade conflict or to reduce their trade imbalance with the US. This will take time, and market volatility will be a key issue during these negotiations.

In addition to trade concerns, fiscal and monetary responses from governments will further influence the market. While the US government remains committed to tax cuts, and Germany’s debt brake has been released, other nations are exploring stimulus measures to counter economic slowdowns. As tariffs are generally deflationary for Europe, we expect the European Central Bank (ECB) to accelerate rate cuts. Meanwhile, US monetary policy may remain slower due to short-term inflationary pressures caused by higher import prices.

The 3D Reset: A Shift to a Deglobalized Regime

In line with Schroders’ 3D Reset, we are witnessing a shift from a globalized regime with deflationary shocks in the 2010s, to a deglobalized regime with inflationary shocks. The rise of populist policies and the shift away from globalization are reshaping how governments approach fiscal and monetary policy, which will significantly affect future market dynamics.

Diversifying Equity Exposure in a Shifting Market

As global trade policies evolve, particularly with the US’s role in disrupting international trade, investors are diversifying their equity exposure. The concentration of the S&P 500 in just a few companies presents a high level of stock-specific risk, which was evident with DeepSeek’s impact on the market. Given the economic uncertainty and the changing global dynamics, there are now greater opportunities outside the US.

In Europe and China, there is an expectation that government responses will be more stimulative for markets, creating a more favorable investment environment. Diversifying into regional equities can help mitigate risk and capitalize on these evolving opportunities.

Long-Term Outlook and Risks

Looking ahead, the structural issues arising from the 3D Reset — deglobalization, demographics, and decarbonization — are more relevant than ever. Investors must remain flexible and well-prepared to navigate the crosscurrents that come with these changes.

“Fasten your seatbelts, it’s going to be a bumpy ride,” as the market adjusts to these disruptions. While there are plenty of opportunities, we must look beyond the recent winners to ensure a balanced and sustainable portfolio.

{Source: MSN}

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