Week of March 3, 2025
Dec Mullarkey, CFA, Managing Director, Investment Strategy and Asset Allocation
Rudi Dornbusch, a famous German economist, once said, “It took forever and then it took a night.” He was talking about the 1990s’ Mexican debt crisis that had been percolating for ages and then suddenly erupted. This type of abrupt shift can also spark turnarounds. For example, back in July 2012 as fear of a eurozone breakup was peaking, the head of the European Central Bank (ECB), Mario Draghi, in a press conference promised, “The ECB is willing to do whatever it takes to preserve the euro.” And he emphatically added, “and believe me it will be enough.” It certainly was, and the euro survived.
This week brought one of those moments. As the U.S. commitment to Ukraine and NATO appears to vacillate, Germany announced it would amend its constitution and exempt defense spending from its debt limits. Its leader in waiting, Friedrich Merz, proposed the plan to help Europe’s defense buildup and its battlefield assistance to Ukraine. The European market reaction has been historic. Ten-year German government bond yields jumped the most since German reunification, of its east and west split, 35 years ago. Investors had become more enthusiastic about Europe as a value play this year but now its growth prospects have materially improved as fiscal stimulus takes center stage.
Meanwhile in tariff news, the U.S. imposed tariffs on Canada and Mexico at the beginning of the week, but quickly walked those measures back and will wait another month. The next critical date is April 1 when a formal report, recommending trade changes, arrives on the U.S. President’s desk. Expectations are for details on reciprocal tariffs and more clarity on where tariff policy is heading.
Sources: Bloomberg, Financial Times 2025.
Randall Malcolm, CFA, Senior Managing Director and Portfolio Manager, Public Fixed Income
Canadian GDP growth for the fourth quarter of 2024 recently surprised to the upside, but that was hardly the biggest story for the domestic economy this week. While that growth surprise was led by an increase in the fixed investment component, some of the growth may have also been from supply chains proactively taking in inventory in advance of the now-ongoing tariff disputes between Canada and the United States.
Despite having an extensive trade agreement in place with Canada, U.S. trade policy has become increasingly erratic as the year has progressed. All the while, Canadian inflation has been stubbornly anchored in the top of the Bank of Canada’s target range and could move higher in any subsequent escalation of tariff exchanges. This has created some notable volatility in the bond market, which has been subject to a constant barrage of trade flow comments and prone to vacillate between the outcome of trade tensions – be it lower growth, higher inflation or both. While bond market liquidity has not frozen, it has been frosty at times.
Sources: Statistics Canada, Bloomberg, 2025.
Linda Kong Ting, CFA, Senior Director and Credit Analyst, Asset Management
Tariff news continues to flow fast and furious from the White House, and there is still little indication of where it all shakes out. However, the uncertainty of the current environment does not, in our view, augur well for corporate financial planning. This might merit some additional caution with respect to regional banks, in our view, where we see potential dampers on loan growth due to uncertainty, as well as the rolloff of commercial real estate loans. Large-cap global systemically important banks (GSIBs) in the U.S. might be better positioned, as they can capitalize on elevated volatility in their trading books and the potential for greater deficit spending in Europe, even if loan growth disappoints.
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