Muzinich Weekly Market Comment: You can’t make an omelette….

April 28, 2025

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In our latest roundup of the key developments in financial markets and economies, we look back on a calmer week, but wonder how long it will stay that way.

Financial markets rebounded last week as investor sentiment improved. The recovery followed a typical pattern. In fixed income, government bond curves bull-flattened, high yield outperformed investment grade, and all credit asset classes delivered positive total returns.

In commodities, industrial metals outpaced gold, while in currency markets, the Swiss franc and Japanese yen weakened against the US dollar. Emerging market currencies moved in the opposite direction, appreciating against the greenback.

There was a broad rally in equity markets, with the Bloomberg World Large & Mid Cap Price Return Index climbing over 3%. Our preferred volatility gauges for assessing market sentiment, the Volatility Index^[1] (equities) and MOVE Index (bonds)^[2], both moved significantly lower, reflecting reduced risk aversion.

The rest is politics

Politics continue to be the driving force behind market moves, which has been the case for most of the year. For now, economic data and corporate earnings are taking a back seat, seen as backward-looking information, with investors instead taking direction from political developments and announcements.

In President Donald Trump’s second inaugural address, he declared: “My proudest legacy will be that of a peacemaker and unifier.”^[3] That claim, however, feels a distant prospect currently. His most ardent supporters might argue “you can’t make an omelette without breaking a few eggs”, while his critics contend the US administration has stoked conflict — potentially igniting wars on five different fronts.

The first area of conflict lies within President Trump’s own administration. Federal Reserve Chair Jerome Powell found himself in the crosshairs last week following his recent speech at the Economic Club of Chicago.^[4] There, he warned of the strong likelihood that consumers will face higher prices, and unemployment could rise in the short term because of tariffs.

Powell said this scenario presents a dilemma for the Fed: any move to address inflation through interest rate hikes could further worsen unemployment and vice versa. But he suggested that the Fed might prioritize its inflation mandate over employment goals if the two came into conflict. “Without price stability, we cannot achieve the long periods of strong labour market conditions that benefit all Americans,” he said.

It is possible Powell was also thinking about his legacy, with his term set to end in May 2026. Under his leadership, the Federal Reserve was forced to hike interest rates at the fastest pace in several decades after initially misjudging inflation as transitory — a mistake he is no doubt eager to avoid repeating.

Trump, a long-time advocate of lower interest rates, was not impressed. He voiced his frustration on social media, declaring: “Powell’s termination cannot come fast enough!”^[5]

However, any undermining of central bank independence is deeply unsettling for investors. Recent experiences in countries like Turkey and Brazil, where political interference in monetary policy triggered market instability, serve as prime examples. Markets reacted negatively and swiftly to Trump’s comments, prompting him to clarify he has “no intention to fire” Powell.^[6]

DOGEball

The market received a further boost following Tesla's Q1 earnings call, where Elon Musk officially announced he will step back from his role at the Department of Government Efficiency and refocus his efforts on his manufacturing business, starting next month.

Meanwhile, US Treasury Secretary Scott Bessent stated the International Monetary Fund and World Bank serve critical roles and the Trump administration is willing to work with them, but warned they should refocus on their core mandates.^[7]

The war in Ukraine and conflicts across the Middle East have made Steve Witkoff a much sought-after figure. The Kremlin confirmed that President Vladimir Putin met with US Special Envoy Witkoff in Moscow last Friday, their second meeting in two weeks. The Kremlin described the talks as productive, calling them “a very good, reliable channel for communicating positions” between Putin and Trump.^[8]

Over the weekend, Witkoff headed to Oman for the third round of nuclear talks between the US and Iran. He was joined by Iranian Foreign Minister Abbas Araghchi. With the technical talks now concluded, both sides have emphasized their readiness for progress.

The common thread across all these negotiations is the US's sense of urgency and pressure it is placing on all parties to reach peace agreements. In Ukraine, failure to reach a deal could lead to the US stepping back from the conflict. Meanwhile, in the Middle East, the consequences could be even more severe, with Trump telling reporters: “I would much prefer a deal than bombs being dropped.”^[9]

A thaw in the war?

There were grounds for slightly more optimism on the final two conflicts, the Cold War with China and the US’s global tariff regime. There are signs tensions between the US and China may be starting to thaw, with the US open to discussions on reducing tariffs and China contemplating suspending tariffs on medical equipment, industrial chemicals, and waiving tariffs on airplane leases.^[10]

President Trump indicated his administration is already having trade discussions with China, despite Beijing denying the existence of any negotiations.^[11] Meanwhile, in broader global tariff news, the US announced significant progress with Japan and South Korea, with US negotiators suggesting an "agreement in principle" could be reached as early as next week with South Korea.^[12]

The combined economic output of the US and China accounts for approximately 45% of global GDP.^[13] Any reconciliation between these two superpowers would therefore be seen as constructive for the global economy and financial markets.

Growth downgrades

The consequences of the global tariff war were made clear in the updated economic forecasts released by the International Monetary Fund and World Bank during their Spring Meetings in Washington, D.C. last week. Global growth for 2025 was downgraded by 0.5 percentage points to 2.8%, with the US growth forecast cut by 0.9% to 1.8% and China’s cut by 0.6% to 4%.^[14]

These downward revisions reflect tariff levels not seen in over a century, and more critically, the exceptionally high level of global trade uncertainty. This was highlighted in the IMF’s latest World Trade Uncertainty Index, which is now significantly higher than during the pandemic (See Chart of the Week).

Unpredictability perhaps poses an even greater challenge than high tariffs. While definitive tariffs come with costs, they at least allow companies to reorganize supply chains and consumers to seek alternatives. But the current lack of clarity makes it nearly impossible for businesses and consumers to plan. A common response to that is inaction and, ultimately, economic stagnation.

Therefore, if US negotiators can demonstrate a swift turnaround in finalizing trade agreements, the renewed sense of certainty could help support a recovery in financial markets and limit the loss in economic output.

Overall, last week saw more constructive political news flow than negative, and investors responded accordingly. However, the foundations of the market rally remain fragile, setting the stage for potential volatility in May, historically a tough month for investors.

Chart of the Week: Uncertainty rising

Source: IMF, World Uncertainty Index (WUI), Trade Policy Uncertainty (TPU), Economic Policy Uncertainty, as of April 2025. The IMF’s uncertainty measures quantify media attention to global news related to global, trade and economic uncertainty. For illustrative purposes only.

Past performance is not a reliable indicator of current or future results.

 

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. References to specific companies are for illustrative purposes only and does not reflect the holdings of any specific past or current portfolio or account. The opinions expressed by Muzinich & Co. are as of April 28, 2025, and may change without notice. All data figures are from Bloomberg, as of April 25, 2025, unless otherwise stated.

References

[1] Chicago Board Options Exchange, Volatility Index, as of April 25, 2025
[2] ICE Index Platform, ICE BofA U.S. Bond Market Option Volatility Estimate Index, as of April 25, 2025
[3] The White House, ‘The Inaugural Address,’ January 20, 2025
[4] Federal Reserve Board, ‘Speech by Chair Powell on the economic outlook,’ April 16, 2025
[5] CNN, ‘Trump goes after Federal Reserve’s Powell again,’ April 23, 2025
[6] Reuters, ‘Trump says he has no plans to fire Fed's Powell,’ April 23, 2025
[7] US Department of the Treasury, ‘Treasury Secretary Scott Bessent Remarks before the Institute of International Finance,’ April 23, 2025
[8] Financial Times, ‘Steve Witkoff holds peace talks with Vladimir Putin in Moscow,’ February 25, 2025
[9] The New York Times, ‘Trump Says U.S. Could Lead Military Action Against Iran if Talks Collapse,’ April 25, 2025
[10] Bloomberg, ‘China may exempt some US goods from tariffs,’ April 25, 2025
[11] South China Morning News, ‘Fake news: China dismisses claims of US trade talks,’ April 24, 2025
[12] Reuters, ‘U.S. and South Korea had 'very successful' trade talks, Bessent says,’ April 24, 2025
[13] World Bank Open Data, as of April 2025
[14] IMF, ‘World Economic Outlook,’ April 25, 2025

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