Eurozone at Risk Amid Global Trade Tensions

Pimco, a leading bond investment firm managing $2 trillion in assets, has cautioned that a potential trade war initiated by Donald Trump’s "America First" policies could push Eurozone interest rates back to emergency levels. The warning highlights vulnerabilities in the Eurozone economy as it braces for potential fallout from aggressive US tariffs.

Andrew Balls, Pimco’s Chief Investment Officer for Global Fixed Income, stated:

“The worst version of the trade situation would be difficult for Europe.”

Pressure on the Euro and Interest Rates

• The euro has already dropped 5% since September, now trading near $1.06, as investors anticipate rate cuts by the European Central Bank (ECB) to cushion economic shocks.
• Markets are predicting a cut in the ECB’s deposit rate to 1.75%, down from the current 3.25%, though Pimco warns the ECB could lower rates even further.

Pimco also expects the euro to continue weakening against the dollar if the situation escalates.

Broader Market Implications

• France: Despite recent turmoil in France’s public finances, Pimco believes the budget crisis and high borrowing costs are unlikely to become a systemic issue for the Eurozone.
• UK Outlook: In the UK, a global trade war could lead to further rate cuts, with the Bank of England expected to lower rates to 4% by next year. Pimco favours UK gilts over US Treasuries, anticipating greater rate reductions in Britain.

Economic Context

The Eurozone is facing compounded challenges, including the aftermath of the pandemic and political instability in major economies like France and Italy. However, Andrew Balls noted that European markets have shown resilience through multiple shocks, reinforcing investor confidence in the region.

Source: (FT.com)