As explained by John J. Hardy, Chief Macro Strategist at Saxo, global markets experienced sharp declines in early April as investors seriously began pricing in the risks related to the new trade regime imposed by the Trump administration. The so-called “Liberation Day” at the start of Q2 marked the moment when the global market realized the scale of potential tariff consequences. However, as some traders predicted, the “TACO” scenario (Trump Always Chickens Out) quickly materialized: the president announced a 90-day delay for new tariffs for most countries except China, leaving room for trade negotiations. In mid-May, a preliminary agreement was reached between the US and China on reducing the most restrictive tariffs, creating a foundation for a potentially more stable market environment in Q3. Investors hope that the upcoming months will bring more clarity than the first half of the year. Nevertheless, in the era of Trump 2.0, no fixed rules of the game can be assumed.
Outlook for Q3: Key Market Risks
US-China: How Will the Rivalry Evolve and Who Holds the Advantage?
China remains the “world’s factory,” and finding alternatives for their full production spectrum is extremely difficult. Their most important asset remains rare earth metals—both in terms of processing and use in key industrial components. Markets breathed a sigh of relief when China resumed rare earth exports after an almost embargo in early April. However, serious caveats remain: China is fully aware of its position—not only as the main supplier and refiner of rare earth metals but also as a key manufacturer of industrial components containing these metals, especially magnets used in chip production, electric vehicle batteries, wind turbines, and military equipment. It is estimated that over three-quarters of US military equipment contains components with rare earth metals. Building a fully independent supply chain from China would take years—even with full commitment.
After a brief export halt in Q2, China announced it will limit export licenses to six months. It also introduced the possibility of monitoring recipients and restricting deliveries for selected end uses, such as military technologies.
Meanwhile, the US maintains significant advantages, especially in jet engine component manufacturing for Boeing and in exporting ethane—a key raw material for plastics production.
First Major US Trade Deals and Tariff Timelines
Besides the partial easing of US-China tensions, markets will closely watch the impact of American tariffs on other economies. At the time of writing, President Trump is expected to announce a new tariff schedule targeting countries considered less strategic or negotiating “in bad faith.” Key importance in Q3 may lie in new trade agreements with traditional US security allies—Japan and the European Union. However, talks with Japan may face political difficulties as the tone of negotiations could change after the upper house parliamentary elections scheduled for July 20.
While few expect a return to the tariff levels announced in April’s “Liberation Day,” current rates will likely remain elevated—averaging 12–18%. This represents a significant burden on both US and global economic growth.
Chart 1: EUR/USD and the US-Germany 10-Year Bond Yield Spread
In recent years, the EUR/USD exchange rate has largely reflected the spread between US and German long-term bond yields, as seen in the chart depicting the difference between US 10-year Treasury yields and German bunds. This year brought an unusual divergence—first, Germany announced a massive fiscal expansion causing yields on German and European bonds to rise relative to global peers. Fiscal expansion typically supports a currency. The next euro rise against the dollar is harder to attribute to European events and is more likely related to concerns that Trump’s trade barriers and US fiscal policy mean capital returning to US markets won’t be rewarded with high returns.
Iran-Israel Conflict: De-escalation or Escalation?
This review was written amid renewed tensions between Israel and Iran due to Israeli efforts to block Iranian nuclear ambitions. The impact on oil markets has been significant, sparking fears of another inflation wave.
However, the effects of geopolitical tensions remain difficult to predict and process by market participants. For central banks whose decisions directly affect markets, the likely scenario is to ignore energy-driven price rises—provided growth prospects and economic sentiment deteriorate simultaneously. In such a case, they might maintain an accommodative policy even if inflation rises due to energy price shocks.
US Recession Risk
The risk of a US recession is likely to rise in the second half of the year. This will be partly a consequence of the economic slowdown after tariffs peaked in Q1 and early Q2, as well as leading indicators signaling an impending slowdown. Prolonged high interest rates relative to inflation add pressure, and the housing market shows clear signs of deterioration. We anticipate a mild recession in the second half of the year before inflation accelerates again early next year—just ahead of US midterm elections.
Further deterioration in growth prospects results from tariffs acting like a tax—increasing prices without increasing available consumption funds. Consequently, households either reduce purchases of certain goods or cut spending in other areas, leading to real economic slowdown.
Trump’s Anti-Immigration Policy Could Have Unexpected Growth Effects
ICE raids and deterrent actions cause some undocumented workers to avoid the labor market, with some opting for voluntary deportation. While hard data is lacking and mostly anecdotal evidence exists, side effects on consumption and labor supply in sectors dependent on this group—such as agriculture, construction, and hospitality—are expected.
Uncertainty over AI’s Impact on Labor Markets
Technological disruption may trigger the first recession among white-collar workers as highly cognitively demanding jobs are replaced by efficient AI tools. So far, reports remain mostly anecdotal, but firm data may emerge in Q3 or shortly thereafter, enabling a real assessment of this phenomenon.
Market Forecasts
Weak Dollar, Strong Precious Metals
The Trump 2.0 administration’s economic policy remains distinctly anti-globalist—what economist Russell Napier calls “national capitalism,” others term “reverse mercantilism.” The US is trying to dismantle the global economic order it helped build since WWII. This system supported trade expansion and globalization, providing low prices for American consumers, with a strong dollar playing a central role—allowing other countries to suppress their currencies to promote exports. This weakened US manufacturing and increased dependence on external supply chains, now seen as a national security threat.
Despite protectionist rhetoric and Trump’s transactional style, the US dollar will remain a key reserve currency, though its global role may gradually diminish.
Other major economies are restricting capital flows to the US—including US stocks and Treasury bonds—to balance domestic consumption and investment. In Europe, this trend is visible, driven by declining confidence in the transatlantic alliance and revised trade cooperation with the US. Germany’s new aggressive fiscal expansion gave the euro a significant boost—EUR/USD could reach 1.25 by year-end.
In Japan, progress in talks with the Trump administration remains slow, likely due to internal political factors. Meanwhile, a very weak yen signals warning for US-Japan trade relations, potentially pressuring the currency to strengthen.
Precious Metals Drive Commodities—Further Gains Ahead
The commodities sector had a strong first half of the year—the Bloomberg Commodities Index is currently up about 9%, clearly outperforming other dollar-denominated assets, including bonds and stocks. Both the S&P 500 and Nasdaq lag far behind. Although commodities usually gain during strong economic growth, the current rally is mainly driven by geopolitical factors and rising investment demand for tangible durable assets, especially precious metals.
Gold has led gains for many months, recently joined by silver and platinum—supported by rising concerns over public finances, tariff-driven supply shocks, labor market weakness, and dollar depreciation. These factors may push the Federal Reserve to adopt a more dovish stance than markets currently expect. There is also a risk of higher inflation and continued gold purchases by central banks—the fourth consecutive year. As a result, fundamentals for gold prices rising to $4,000 over the next 12 months appear realistic.
Silver, which recently broke above $35, may signal continuation of the uptrend—also relative to gold. Since 2022, accelerated central bank demand for gold has caused silver to lag. This is confirmed by the gold-to-silver ratio, currently about 95—well above the five-year average of 80.
Chart 2: Gold Prices and Gold/Silver Ratio
Beyond the changing geoeconomic landscape, a key risk factor for the US dollar remains Federal Reserve policy. Rising recession probabilities in the US increase chances of more decisive monetary easing than currently priced by markets. This could further weaken the dollar and support precious metal prices—both gold and silver.
Stock Market Outlook
For US stocks, many scenarios are possible. Generally, a gradual departure from the “American exceptionalism” concept and a reduction of heavy US equity exposure (which accounted for over 70% of the global MSCI index earlier this year) may mean relatively weaker performance of this segment in coming years.
In the short term, aggressive Fed rate cuts could temporarily support gains, similar to late 2007—before the full scale of the impending global financial crisis was revealed. Additionally, the belief that the US cannot sustainably finance growing fiscal deficits and that inflation is the only effective mechanism to reduce real debt supports the TINA (“There Is No Alternative”) narrative for US stocks. However, in a recession, earnings declines and renewed market volatility should be expected.
Global Markets and Regional Shifts
The gradual fading of US dominance in investment portfolio structures should support other regions relatively. An additional boost for emerging markets could be a weakening US dollar. In Europe, Germany’s fiscal expansion remains a positive long-term impulse, although the slow pace of corporate tax cuts (reducing the CIT rate from 30% to 25% only from 2028) disappoints.
Major Geopolitical Risks
The greatest risks to market prospects are geopolitical. Escalation of the Middle East conflict—especially if Iran views Israeli actions as an existential threat and responds unpredictably—could cause a sharp rise in energy prices and a hard landing for the global economy. In such a scenario, the US could gain an advantage due to its relative energy independence.
Conversely, a renewed significant deterioration of US-China relations—regardless of cause—could trigger another negative shock for financial markets.
