Tumult over President Trump’s approach to tariffs and Russia’s war with Ukraine has spooked households, businesses and Wall Street, with U.S. stocks just booking their worst week of the year.
Trump’s on-off trade tactics kept investors on edge about potential tariffs on goods from Canada and Mexico all week, while Friday’s jobs report for February showed further signs of a cooling U.S. labor market, although nothing too alarming.
The backdrop has clearly bred uncertainty in markets, but has also created opportunity for investors, said Mike Cudzil, a portfolio manager at Pimco, one of the world’s largest asset managers.
Specifically, “there has been a major shift out of Europe and in Germany, in particular,” with the potential for a massive fiscal package out of Europe next week, Cudzil told MarketWatch.
Friedrich Merz, Germany’s likely next chancellor, has vowed to do “whatever it takes” to bolster defense spending by carving it out of budget controls, while also proposing a €500 billion infrastructure investment.
“That maybe only could have been done with some of this [U.S.] policy that looks like chaos,” Cudzil said, pointing to Europe’s hesitancy around defense spending in recent decades.
Goldman Sachs researchers this week said they expect spending on defense by European Union member states to increase significantly through 2027, albeit still reaching only 2.4% of GDP, compared to 1.8% last year.
The new projections followed a shocking Oval Office confrontation a week ago that left Trump without a deal with Ukraine President Volodymyr Zelensky relating to that nation’s mineral rights. It also prompted Europe to bolster its commitment to aiding Ukraine in its war effort.
“What you are seeing is a repricing of risky assets in the U.S. relative to risky assets [abroad],” Cudzil said, adding that he anticipates there’s more room to close that gap. “But there’s also a repricing of U.S. fixed income relative to other fixed-income markets.”
It’s potentially “quite a shift in the world order” versus the past 80 years, he added.
The European STOXX 600 index XX:SXXP was up 9% on the year through Friday, while the U.S. benchmark S&P 500 index SPX was down 1.9%, according to FactSet, after two straight years of stellar yearly gains of more than 20% for American stocks.
