Investment management giant Pimco has issued a stark warning about the potential consequences of a Trump-initiated trade war, suggesting it could push Eurozone interest rates back to “emergency levels” as policymakers attempt to shield the bloc’s vulnerable economy.
Andrew Balls, global fixed income chief investment officer at the $2tn-in-assets manager, predicts multiple rounds of tariff implementations, a policy repeatedly threatened by the US president-elect. The European market has already experienced significant losses as investors brace for Trump’s “America First” policy agenda.
The euro has declined more than 5 per cent since late September, hovering around $1.06, reflecting investors’ expectations of more aggressive rate cuts from the European Central Bank. Market traders are currently anticipating the ECB’s deposit rate to drop to 1.75 per cent from its current 3.25 per cent level.
Pimco’s outlook suggests even deeper cuts might be necessary. Balls emphasised that terminal rates could plummet further if outcomes prove worse than expected, potentially pushing the ECB towards emergency-level policy rates. This perspective has led Pimco to forecast additional euro weakness against the dollar.
The UK economy faces similar challenges, with Balls indicating substantial room for lower terminal interest rates should a global trade war materialise. Current market expectations show three quarter-point cuts from the Bank of England by end-2024, bringing UK rates to 4 per cent. Pimco currently favours UK gilts over US Treasuries, anticipating further rate reductions.
Despite concerns about the Eurozone economy, Pimco remains optimistic about French government debt stability, despite recent budget-related turbulence. The wider gap in French 10-year borrowing costs compared to Germany’s is viewed as an appropriate reflection of France’s fiscal outlook, with limited risk of systemic issues for the currency bloc.
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