Europe

Last week was one of the most volatile on record. President Trump's announcement of a 90-day pause in reciprocal tariffs for every country bar China sparked one of the largest rallies in equity indices in recent history.

After a chaotic week in global markets following the tariffs announced by President Trump on April 2, at time of writing (April 10) investors are left to contemplate 125% tariffs on China, a baseline 10% on the rest of the world, 25% on auto imports and a 90-day pause on more punitive rates.

President Trump’s tariffs have sparked a global sell-off across risk assets, and we expect markets to remain volatile in the short-term given the implications for the global economy.

With the market focus over the last week or so being firmly on equities and credit spreads, it is worth zooming in on developments in the European bank credit default swap (CDS) market.

While much of the focus in private credit has been on direct lending, Significant Risk Transfer (SRT) is emerging as a compelling alternative. What began as a regulatory tool is now gaining traction with a growing investor base, as banks look to optimise capital and issuance reaches record highs.

“Liberation Day” has landed, and not with a whimper. In extraordinary scenes in the Rose Garden of the White House, President Trump held up a board outlining the level of tariffs the US will impose on countries around the world, and in most cases they were worse than worst-case expectations.

If we look at the main drivers of returns in Q1 2025, the first one that comes to mind is tariffs. But while this is true for equities and credit spreads, in the context of global fixed income the main driver of total returns in Q1 was the Bund sell-off triggered by a momentous shift in German fiscal policy.

Last week we wrote about a notable shift in market sentiment and how this had impacted our view of relative value within fixed income. So, where has the impact been felt, and has it changed our view on relative value?

Volatility in Bunds seems to have calmed down slightly in the last few days as markets continue to digest huge fiscal expansion plans from Germany and the European Union. At the same time, many forecasters have been downgrading their US growth projections after reassessing the level of pain President Trump seems willing to inflict on the US economy in order to implement his policy agenda.

The incoming German government’s removal of the country’s infamous “debt brake” is a serious pivot for the typically fiscally conservative country, and one that we think highlights the value on offer in European assets.

European government bonds have sold off sharply this week in the wake of Germany’s market-moving fiscal measures, while European equities, especially those of banks, have moved in the other direction.

Overnight, the CDU/CSU (the winner of the latest German election) and the SPD (the leader of the current parliament set to end on March 25) announced Germany’s largest fiscal policy shift in decades.