Daofu Global: US tariffs may lead to a significant interest rate cut by the European Central Bank, European bonds set to soar.

The strategist at Daofu Global Investment Management stated that European bonds are expected to perform well this year, as the threat of US tariffs will compel the European Central Bank to significantly lower interest rates. The strategist at Daofu Global stated that with the EU economy already showing weak growth and declining inflation, US tariffs will put pressure on the region's export-oriented economy. The strategist added that this will lead the European Central Bank to lower interest rates from 2.75% to 1.5%, below the market's expected 1.9%. The repricing of further rate cuts by the European Central Bank will cause European bonds to outperform US Treasury bonds, as it is expected that the Federal Reserve will only cut interest rates once or twice this year, by 25 basis points each time. Daofu Global stated that this will also cause the Euro to fall back to parity with the US Dollar. Altaf Kassam, Head of Investment Strategy and Research for Europe, the Middle East, and Africa at Daofu Global Investment Management, said, "This could be the year of European government bonds. The pace of rate cuts in Europe will be more moderate than in the US." The yield spread between US and German bonds remains high. Earlier this week, US President Donald Trump stated that tariffs on the Eurozone were "definitely happening", citing the massive trade deficit between the US and the EU. Subsequently, Eurozone bond prices soared. However, Trump agreed to suspend tariffs on Canadian and Mexican goods, easing concerns of a full-blown global trade war, and Eurozone bond prices quickly fell. However, Elliot Hentov, Head of Macro Policy Research at Daofu Global Investment Management, believes this optimistic outlook is wrong. He believes that Trump used tariffs as a negotiating tool with Canada and Mexico, but intends to stick to them for economic reasons when negotiating with the EU. Hentov stated that further rate cuts by the European Central Bank will push the Euro back to parity with the US Dollar. On Friday, the Euro was trading at around 1.04 against the US Dollar, higher than the two-year low of 1.0141 set on Monday. Last year, Lori Heinel, Chief Investment Officer at Daofu Global Investment Management, correctly predicted that the Federal Reserve would cut rates by 50 basis points before the US election, kicking off an easing cycle. However, her expectation of a 150 basis point rate cut by the end of 2024 was proven to be too aggressive, as the Federal Reserve only cut rates by 100 basis points during that period. The market expects the Federal Reserve to cut rates in July, with a 65% likelihood of another cut in December. A market-based long-term inflation indicator in the US is currently above 2.50%, 50 basis points higher than a similar indicator in the Eurozone. Kassam stated, "Unfortunately, we believe the inflation dragon that was supposed to be vanquished has not disappeared. At least in the short term, bonds outside of the US have a greater opportunity."