Markets calmed down going into the Easter break before getting a bit more excited again this week with trade tensions between the U.S. and China the driving force of course. As the standoff between the world's two largest economies intensifies, investors are increasingly jittery about the potential economic fallout.

Looking at share market performance, the S&P 500, representing U.S. large-cap stocks, sank over 2% on Monday April 22nd amid fears that the Federal Reserve's independence could be under threat from the Trump administration. President Trump has ramped up his criticism of Fed Chair Jerome Powell for not cutting interest rates fast enough. Any undermining of central bank independence would be a major concern for markets.

European stocks also struggled, although losses were more muted than the U.S. The UK's FTSE 100 and Europe's STOXX 600 both declined but managed to pare losses later in the week on hopes of potential progress in U.S. trade negotiations with Japan and India. Then overnight Trump appeared to recant his threats from last week about sacking Chair Fed Jerome Powell while he and Treasury secretary Scott Bessent intimated that a reasonable deal even with China was being sought. That took markets back to where they were before Easter but left them still down on the week. Most other equity markets have managed top eke out small gains, and with a lot less volatility.

Meanwhile, bond yields climbed higher, with 10-year U.S. Treasury yields spiking above 4.4% early in the week before retreating slightly. Rising yields reflect expectations that inflation pressures could intensify due to higher tariffs. Australian 10-year yields moved in a similar pattern, but have eased lower in recent days while U.S. bond markets remain volatile.  

In currency markets, the U.S. dollar initially weakened sharply, with the DXY dollar index hitting its lowest level since April 2023 on Tuesday. However, the greenback subsequently regained ground as risk aversion set in. The Japanese yen and Swiss franc, traditional safe haven currencies, strengthened.

Commodities were mixed. Gold soared to an all-time high above $3,430 per ounce, as investors sought protection from market turbulence and potential inflation. However, oil prices fell back after Monday's jump, with Brent crude dipping below $67 per barrel. Weakening global growth expectations are weighing on oil demand.

From a macroeconomic perspective, the IMF downgraded its 2025 GDP growth forecasts this week - the U.S. expansion is now seen at just 1.8%, down from 2.7% previously. World output was trimmed to 2.8%. While a recession is not the base case for most strategists, risks are clearly building and implied probabilities are approaching 50%.

The week ahead will see a further focus on economic data to gauge the trade war impact. U.S. PMI surveys are likely to show a deterioration in business conditions. Tesla earnings were overall disappointing but the stick hardly moved on the news, perhaps due to a more resilient valuation after a 50% stock price plunge since December. Otherwise the 60 companies in that have reported already in the US point to robust business conditions at the start of the year while weak guidance is indicating that companies don't expect this to continue.

Overall, sentiment has taken a significant hit from the trade conflict escalation. With so much uncertainty, volatility is likely to remain elevated in the near-term. The key question is whether both sides can step back from the brink and reach compromises. If not, share markets look vulnerable to further downside but as we saw overnight a sustained détente could bring back the animal spirits equally quickly.  Uncertainty clearly cuts both ways!