Investment environment overview 3/2025

Global equity markets remained volatile in March, mainly due to an escalation of trade tensions, recessionary and inflationary fears. Both U.S. and European equities declined, though the losses in Europe were less pronounced than those in the U.S., mainly due to Germany’s significant defense and infrastructure spending announcements and continued relative undervaluation and higher inflows for European equities against U.S. counterparts, which offset some volatility pressures. Still the European auto sector was hit heavily by the newly announced U.S. tariffs, with most major automaker stocks experiencing losses between 10-15%. Meanwhile, Chinese stocks showed relative strength in comparison to their U.S. and European counterparts. This strength was largely driven by continued gains in technology sector and investor optimism following positive announcements during the National People’s Congress, despite the ongoing U.S.-China trade war.

European and U.S. equities post losses

The STOXX 600 dropped by 5.2%, while the DAX declined by 4.2%. However, during Q1 2025, the STOXX 600 still outperformed the S&P 500 by 17% in dollar terms. The S&P 500 fell by 4.1%, while finishing its worst quarter in almost 3 years. The Russell 2000 declined 4.3%, and the Dow Jones lost 2.8%, while the Nasdaq-100 experienced the steepest decline among U.S. indexes for the month, dropping by 5.6% due to a selloff in tech stocks. The Chinese CSI 300 remained flat over the month, while the Shanghai Composite added 0.6%. Trump’s announcement of the U.S. strategic crypto reserve on the 2^nd of March initially spiked crypto prices — with Bitcoin rising over 11% during the day — though the surge was short-lived, as prices later declined amid the lack of concrete details. Cryptos had another bad month, with Bitcoin closing the quarter just above BTC/USD 82 500, marking a 4.3% MoM decrease, while Ethereum closed the month just above ETH/USD 1 800, marking a steep 20% MoM decline.

Germany’s new bazooka

On March 18, Germany’s Bundestag approved a landmark defense and infrastructure spending package, marking a radical shift in the nation’s fiscal policy. The package exempts defense and security spending exceeding 1% of GDP from the country’s constitutional “debt brake” rules.

This allows for an estimated EUR 400-500 billion in defense investments over the next decade, with Merz framing this new package as “the first major step toward a new European defense community”. Alongside the defense boost, the package proposes a EUR 500 billion infrastructure fund, financed through borrowing, to revive Germany’s faltering economy over the next 12 years. The fund aims to upgrade transport infrastructure, energy grids and housing, while EUR 100 billion have been earmarked for climate-related projects. The initiative aims to reverse years of economic stagnation, while addressing years of minimal infrastructure spending. Critics accuse Merz of abandoning fiscal restraint promised during the campaign, nonetheless, this “bazooka” will be essential to counter external threats and stimulate growth in the country.

The global trade war escalates

President Trump kept rolling out new tariffs throughout the month, once again targeting the U.S.’ key trading partners and reigniting the global trade war. New provisions included a 25% tariff on all steel and aluminum imports, a 25% tariff on all vehicles made outside the U.S., and an increase in tariffs on all Chinese imports from 10% to 20%. Additionally, new tariffs came into effect on Canada and Mexico, with Canada facing a 25% tariff on USD 21 billion worth of Canadian goods, primarily steel and aluminum, vehicles, agricultural products, forestry and machinery, while Mexico was targeted with a 25% tariff on agricultural goods and vehicles. However, temporary exemptions for both countries were provided for certain automakers under the United States-Mexico-Canada Agreement (USMCA) until 2 April.

Trump has justified these new tariffs as necessary to protect American industries and address trade deficits, but they were met with swift international retaliation. Canada introduced a 25% tariff on USD 21 billion worth of American goods, primarily targeting steel and aluminum, industrial tools and IT products. China retaliated with tariffs of 10-15% on U.S. agricultural products, including soybeans, pork, and dairy, while also suspending import permits for certain U.S. businesses. Meanwhile, the EU has said that it will target a range of U.S. goods worth USD 28 billion, including beef, motorcycles and whiskey alongside American steel and aluminum, with the first tariffs coming into effect at the start of April, and a second larger package anticipated for mid-April. At the time of writing, Trump’s new reciprocal tariff policy has taken effect, with tariff rates for each country seemingly determined by the size of its trade deficit with the U.S.

Additionally, Trump threatened new tariffs on Russian crude, warning of tariffs between 25% and 50% on countries purchasing Russian oil if Russia does not agree to a ceasefire in the Russia-Ukraine war.

Worrying American economic data

The Eurozone’s manufacturing sector remains in decline, but the pace of contraction has slowed somewhat. However, the usually strong services sector shows weakness, with its PMI slipping to 50.4 from 50.6 in February. Inflation in the Eurozone eased to 2.2% YoY, coming in lower than anticipated and showing no signs of renewed price pressures.

​The U.S. manufacturing sector slipped back into contraction, with the ISM PMI declining to 49.0, while the services sector also experienced a notable slowdown, as the ISM Services PMI fell to 50.8 from 53.5 in February. Meanwhile, according to ADP, businesses added 155 000 workers to their payrolls in March, surpassing the projected 84 000, and showing that the labor market is still strong despite recessionary fears. U.S. inflation eased, falling to 2.8% YoY, but still making a Fed rate reduction unlikely in the near term. The Atlanta Fed’s GDP estimate saw a brief mid-month improvement but has since dropped to -3.7%. Meanwhile, the newly introduced gold-adjusted GDP measure, designed to better reflect economic conditions, stands at -1.4%, signaling significant recession risks. Amid growing concerns, major banks have also raised their U.S. recession forecasts. Goldman Sachs increased its one-year recession probability from 20% to 35%, citing new tariffs, which could drive average U.S. tariff rates to 15%, pushing up prices and slowing growth. The American Bankers Association estimates a 30% recession risk for both 2025 and 2026, while J.P. Morgan has raised its global recession probability to 35% by year-end, up from 25%.

Dollar shows signs of weakness as precious metals gain

The EUR/USD had its strongest month in a long time, breaking through the 1.0550–1.0600 resistance without much struggle. After climbing from around 1.0380 to 1.0950, it closed near key levels within the broader downtrend, which might suggest that the market may now favor buying on dips rather than selling on rallies. The key resistance is at 1.1200–1.1300, and while breaking 1.1300 may take some time, any strong move above this level could signal a long-term trend reversal.

Gold remains the strongest among precious metals, but since it has met all our key targets we are gradually taking profits. Silver had a solid month, but still lacks momentum — it needs to clear a key resistance level to gain strength. Platinum is the weakest, but is building up energy for a move higher, making it a good candidate for adding long positions.

Regional highlights

During the month, the OMX Baltic Benchmark Index rose by 0.91%. In regards to defense budget revisions, Latvia’s Economics Minister said the country aims to raise defense spending to 5% of GDP by 2028, with a 4% increase planned this year. Lithuania is also boosting its defense budget, aiming for 6% of GDP by 2026, with plans to maintain 5% to 6% annually between 2026 and 2030, while Estonia has committed to increasing defense spending to 5% of GDP by 2026. Meanwhile, Enefit Green has announced its exit from the Nasdaq Tallinn exchange due to the ongoing takeover offer by its majority shareholder, Eesti Energia. The company has indicated that following a successful voluntary share buyback offer, which aims to increase Eesti Energia’s stake to at least 90%, it plans to initiate a process to delist from the exchange. The delisting is part of a broader strategy to simplify the administrative structure and enhance the operational efficiency of Enefit Green under Eesti Energia’s full ownership.