Tariffs – 50% Hit on EU? Delayed for Now
Last Friday, Trump abruptly ended the 90-day tariff pause by recommending a 50% tariff on EU imports, set to take effect on June 1, 2025. Earlier that week, the EU had submitted a proposal to gradually reduce tariffs to zero on both sides for non-sensitive agricultural and industrial goods, even though its materialization was probably unrealistic given the terms of the U.S.–UK deal.
Markets reacted quickly but didn’t fully price in the shock: the S&P 500 fell 1%, US treasuries were almost unchanged, and expectations for an ECB rate cut in June solidified. Just as Trump once played his game with China – lifting tariffs only to lower them – so too, on Sunday, after a call with von der Leyen, he quickly postponed the 50% tariffs on the EU to July 9. The market’s reaction was nearly muted, as it was largely anticipated.
US Fiscal – Beautiful Bill Clears the House
President Donald Trump’s ‘One Big Beautiful Bill’ has passed the US House of Representatives by a narrow 215–214 vote. The bill now moves to the Senate, where potential amendments are anticipated. President Trump has urged the Senate to expedite its consideration of the bill, aiming for final approval by 4 July, although that deadline seems ambitious. The US is already running a deficit exceeding 6% of GDP, and there is a growing sense that fiscal discipline is being sidelined. Tariff revenues may offer some relief, but given the uncertainty around their implementation, they cannot be relied upon as a stable source of revenue. US rates reacted accordingly, with the 30-year yield touching 5.1% last week and the curve steepening aggressively.
Japan – Bond Harakiri
In Japan, the April national core CPI accelerated by 0.1 percentage points from March to 3.0% year on year. The main driver was rising food prices, which also triggered political fallout: the farm minister resigned after making controversial comments about rice prices. In the bond market, a weak 20-year JGB auction negatively affected the 30-year and 40-year sectors. Despite the volatility, Japan’s bond market remains largely domestically held, making it less dependent on external funding.
But domestic demand is shifting: major buyers of long-dated JGBs such as insurance companies, have recently reduced their purchases. The movement in yields is now being driven by a gap between supply and demand. With a debt-to-GDP ratio of 240%, concerns about fiscal sustainability are resurfacing, and elections scheduled for this summer introduce a significant tail-risk. Japan, long seen as a standalone case, is now increasingly exposed to the global repricing of long-term risk.
European Elections – Winds of Change
In Romania, the presidential runoff held on 18 May resulted in the victory of Dan, the centrist and pro-EU mayor of Bucharest, who defeated far-right candidate Simion with 53.8% of the vote. Dan’s agenda focuses on reducing the budget deficit, bringing fiscal consolidation, and reaffirming Romania’s alignment with the EU to secure continued access to EU funds. The bond market responded strongly, with a pronounced bull flattening of the local curve. The risk of a downgrade from rating agencies is a diminishing yet real threat.
In Poland, the first round of the presidential election took place on 18 May, with no candidate securing an outright majority. Trzaskowski, the centrist mayor of Warsaw, led with 31.3% of the vote, closely followed by conservative Nawrocki, who received 29.5%. A runoff between the two is scheduled for 1 June, with the latest polls projecting a narrow outcome. Market implications are expected to remain limited.
In Portugal, the snap legislative elections held on 18 May led to a relative victory for the centre-right Democratic Alliance (AD), led by outgoing Prime Minister Montenegro. AD secured 89 out of 230 seats, remaining the largest bloc but falling short of an absolute majority. Portugal’s solid growth and careful debt approach should continue, even in a more uncertain political framework.
Algebris Investments’ Global Credit Team
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