July 14th, 2025 - The tariff endgame is nearing.

For those familiar with chess, they know that at some point the game will have to enter its final phase, the endgame. This is when players are measuring up their losses, estimate their probabilities of winning and devise their last attacking strategy. Even in chess, there is the potential outcome of a draw, either by mistake (stalemate) or by mutual agreement of the players. Of course, President Trump is more of a poker player, as he usually refers to the cards of his "opponents". In poker, there is always the quick, "all-in" option to either scare everyone out or because your hand is indeed unbeatable. In the case of the US, they definitely do not have an unbeatable hand, as the government is grossly indebted, running high fiscal and trade deficits and relies on the funding by the same "players" around the table, whom Trump is trying to coerce into signing deals.

Three months have elapsed since "liberation" day. Three months of hope, a stock market rally and only two deals between the self-proclaimed master of deals and the rest of the world (UK and Vietnam). The one with the UK is basically a confirmation of various agreements or discussions that were already in place since Brexit and Vietnam recently questioned if they actually do have a deal. Everyone else is receiving either letters with President's Trump final offer, as he described them, or threats through social media. Those market participants who thought that he would back down from his agenda must be very fond of tacos (i.e. Trump always chickens out). On the contrary, he is back with a vengeance. Tariffs for him are not only a source of much-needed income for the government, it is a pure obsession and his only weapon to blackmail even non-financial deals out of the rest of the world.

The most recent victims are Japan, Brazil, Canada, Mexico and now the European Union, who are facing tariffs between 30-50% if by 1st August they do not reach a deal with the US. More than 50% of the US imports come from these regions, which means that such huge tariffs will have a devastating effect on consumer prices and eventually on economic growth. Lest we forget , there was also the 50% tariff on imported copper, which was also announced last week. The optimists point to the fact that the July 9 deadline had already moved out to August 1st, which means that President Trump primarily wishes to finally make his deals rather than impose those tariffs.

No-one really knows what the endgame will look like. But what investors should perhaps make necessary adjustments in portfolios to account for the increased risk of inflation and economic stagnation that could lie ahead, due to tariffs. At the same time, we have to acknowledge the very positive catalyst of Europe's increased spending on infrastructure and defense, which can continue providing outperformance for the region's equity markets. In our latest quarterly investment committee we discussed the possibility to reduce equity exposure in the months to follow, to continue avoiding long-duration bonds and confirmed the value of owning metals such as gold and platinum.

The minutes of the last FED meeting revealed the difficult dilemma, we have been discussing. Namely, it faces upside risks to inflation and downside risks to growth from potential tariffs and trade policy changes: "Participants noted that the Committee might face difficult tradeoffs if elevated inflation proved to be more persistent while the outlook for employment weakened." We have argued that in this case, the FED will chose to fight inflation, by raising rates and eventually "killing" the economy, which is a disinflationary catalyst in itself. However, they also left the door open to further rate cuts this year, as according to the minutes, most policymakers "assessed that some reduction in the policy rate would be appropriate at some point this year". Only "some" disagreed, while two members argued for a rate cut in July.

Speaking of the FED, Mr. Powell continues to be under "attack" by Trump and his entourage. In a new episode, the head of the US Office of Management and Budget, Mr. Vought, accused him of spending 2.5bn$ to renovate the central bank's building with a 700mn$ overspend in gardens, rare marbles and lavish dining rooms. The FED building costs more than the "Palace of Versailles", he commented. He continued with an even more serious accusation, that Mr. Powell allegedly lied to Congress during his testimony regarding these renovations. Mr. Vought served at the FED during Trump's first term and is known as an ardent Trump supporter and his attack adds pressure on Powell to resign, as Trump and friends would wish. Were Mr. Powell to leave abruptly, financial markets will erupt to chaos, with the most damage felt on US assets (dollar, bonds, equities).

No major macro-economic data were out last week, ahead of the June inflation data due tomorrow in the US. The first signs of tariffs' impact should emerge, with the market expecting the headline number to have increased to 2.6% from 2.4% and core to have reached 3% again from 2.8% in May. These data will come just two weeks ahead of the next FED meeting (July 30) and could be market moving, in any direction. The chatter on the street is that companies do not seem to have absorbed the bulk of the already existing 10% global import tariff, which means that this must have spilled into retail prices. Of course, inventories were increased ahead of the April 2nd announcements and companies were able to sell with previous prices, but that stock must have been depleted by now and the worst for inflation risk or damage on operating profits is ahead of us.

Equities had a rather mixed week. Europe staged a rebound of 2% on average, based on a rotation into lagging sectors such as autos, luxury and other consumer-related names. Healthcare was broadly sold, as the sector is under attack by Trump, who is threatening a 200% tariff on imported drugs. Defense names have also lost some of their momentum, after the NATO summit confirmed what was already in the prices, and as analysts warn that the current quarter will not be as spectacular as the previous one, in terms of earnings. The US markets were under minor profit taking , despite Nvidia reaching the 4trn $ mark, which helped Nasdaq remained flat for the week.

Government bonds were negative, as tariffs and increased fiscal deficits are not friendly to the asset class. The German 10yr yield climbed back above 2.70%, confirming our view to avoid long-duration bonds for now. The US 10yr rose to 4.45%. We should mention at this point that the movement in the two yield curves has been different in the recent months. The US yield curve has "bull steepened", meaning that short-term rates have fallen more than long-term, and this usually indicates the market discounting a significant economic slowdown. On the contrary, the German yield curve has "bear steepened", as short-term yields have fallen but long-term yields have risen, and this usually indicates that the market is discounting stronger economic growth ahead.

Chart of the Week : Profit estimates for 2025 have fallen significantly.

The recent rally both in the US and in Europe has taken place against a significant downgrade of consensus earnings estimates for the year. The above chart shows the path of the analysts' estimates for the Stoxx Europe 600 Index, which have fallen already 8% in the first six months of the year, primarily driven by pessimism and a change in modelling to include the tariffs' impact. It is not uncommon the earnings estimates to be downgraded throughout the year, as analysts tend to be over-optimistic in late December ahead of their holidays, or the opposite, overly pessimistic and then earnings are upgraded. But this year's trajectory is very steep and actually follows the path of 2008 (hopefully we will not have the same outcome finally). For the S&P500, earnings are also downgraded by about 5% since the start of the year. Of course, the significantly lower expectations can provide positive surprises and then drive upgrades for the remaining of the year. We will find out in the next 3-4 weeks.

Disclaimer

• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.

• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.

• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.

• This document is strictly confidential and should not be distributed further without the explicit consent of Kendra Securities House SA.

• Sources: Chart of the Week : Pictet