In the first half of 2025, the global financial market experienced an unprecedented and violent shake-up under the dual impact of the Trump administration's tariff policies and the Federal Reserve's monetary policies. Asian stock markets plummeted collectively on multiple occasions, with the Nikkei 225 index suffering a record-breaking single-day decline. The Indian Sensex index and the South Korean KOSDAQ index also witnessed significant corrections. Concurrently, the US dollar index continued to weaken, hitting a nearly three-year low, while non-US currencies such as the euro and the pound strengthened. This global financial storm triggered by US policies is reshaping the landscapes of international trade, the monetary system, and capital markets.
Trump's Tariff Policies: A "Time Bomb" for Global Trade
The "reciprocal tariff" policies implemented by the Trump administration emerged as the core variable triggering turmoil in global financial markets. In April 2025, Trump announced a 10% benchmark tariff on all imported goods, along with differentiated additional tariffs on 60 countries, including a 34% tariff on China and a 46% tariff on Vietnam. This policy not only violates the non-discrimination principle of the World Trade Organization but also directly disrupts the stability of global industrial and supply chains.
The impact of tariff policies on global financial markets has been significant. Following the announcement, the three major US stock indices recorded their largest single-day declines in nearly five years, with the S&P 500 falling by 4.8%, the Dow Jones Industrial Average by 3.98%, and the Nasdaq Composite Index plummeting by 5.97%. The Asia-Pacific markets were not spared either, with the Nikkei 225 index dropping by 4.05%, the South Korean KOSPI index by 3%, and the Vietnamese stock market experiencing its largest decline since 2001. Global risk assets generally declined, the VIX panic index surged to 35, and market risk aversion intensified.
From an economic perspective, tariff policies have driven up US inflation levels, with a short-term CPI increase of 1.3% and the potential for long-term stagflation risks. China's exports to the US (US524.7billionin2024)faceacomprehensivetariffrateof54198.6 billion over two years. Under the pressure of global trade contraction and supply chain restructuring, Asian manufacturing and export-oriented economies face severe challenges.
Federal Reserve Policies: A Struggle Between Independence and Political Pressure
While tariff policies have triggered market turmoil, the Federal Reserve's monetary policy independence has also faced severe challenges. Trump has repeatedly publicly pressured Federal Reserve Chair Jerome Powell to cut interest rates to stimulate the economy, even threatening to dismiss Powell prematurely. This political interference has undermined market confidence in the Federal Reserve's independence, exacerbating financial market volatility.
In the first half of 2025, the Federal Reserve adopted a cautious stance on interest rate cuts. Despite a slowdown in US economic growth and easing inflationary pressures, Trump's tariff policies have driven up import prices, and tightened immigration policies have strained the labor market. The Federal Reserve is concerned that interest rate cuts could trigger a "wage-price spiral," further exacerbating inflation. However, as the economic impact of tariff policies gradually manifests, the market widely expects the Federal Reserve to initiate an interest rate cut cycle in the second half of the year.
The Federal Reserve's policy shift has had a profound impact on global financial markets. Rising expectations of interest rate cuts have increased downward pressure on the US dollar, providing a window of appreciation for non-US currencies. Global bond yields have declined, and capital has accelerated its flow into risk assets, driving stock market rebounds. Emerging market countries face capital inflow pressures but must remain vigilant against the risk of "hot money" withdrawals triggered by a shift in Federal Reserve policies.
Asian Stock Markets: Volatility and Opportunities
Under the combined influence of Trump's tariffs and Federal Reserve policies, volatility in Asian stock markets has intensified, with varying performances across different markets. The Japanese stock market has emerged as the most favored market in Asia in 2025, supported by factors such as sustained wage increases, advancing governance reforms, a relatively weak yen, and a slow pace of interest rate hikes. Despite Japanese stocks no longer being as cheap as last year, their overall earnings growth prospects continue to provide support.
The Indian stock market, however, faces challenges from high valuations and macroeconomic headwinds. Since the third quarter of 2024, historically high valuations and macroeconomic headwinds have led to a temporary outflow of capital from India. Slowing consumption, a decline in credit growth to its lowest level in nearly three years, and deteriorating asset quality have further eroded investor confidence in Indian financial stocks. Nevertheless, in the medium to long term, India's urbanization rate and per capita GDP are comparable to China's levels 20 years ago, indicating significant development potential and space, particularly in the services and consumer-related sectors.
The Chinese stock market performed impressively in 2024, ranking among the top 37% in terms of annual gains over the past three decades. Despite uncertainties such as tariff policies in 2025, major institutions have improved their outlook on the Chinese stock market compared to previous periods. Policy stimuli are expected to help the domestic economy emerge from its trough and gradually stabilize, driving a recovery in the earnings of listed companies. Market consensus estimates that earnings of A-share listed companies are expected to grow by 13.6% in 2025, ranking second only to the United States among major global stock markets.
Global Financial Upheaval: Restructuring and Challenges
The interplay between Trump's tariff policies and Federal Reserve policies is reshaping the global financial landscape. On one hand, the vulnerability of the US dollar system has been exposed, accelerating the global process of "de-dollarization." In the third quarter of 2024, the US dollar's share of global official foreign exchange reserves dropped to 57.4%, a 30-year low. The Chinese yuan, gold, and emerging currencies are on the rise, with BRICS countries exploring resource-backed currencies. Over 130 countries are advancing central bank digital currencies, and cross-border settlement systems are undergoing rapid restructuring.
On the other hand, volatility in global financial markets has increased, and the risk of asset price bubbles has intensified. In a low-interest-rate environment, capital has flowed into assets such as stocks, bonds, and real estate, driving up valuations. However, once the Federal Reserve shifts its policy or greater global economic uncertainties emerge, asset bubbles could rapidly burst, triggering a new financial crisis.
For emerging market countries, this financial upheaval presents both challenges and opportunities. The challenges lie in the potential for a stronger local currency due to a weaker US dollar and capital inflows, which could erode export competitiveness. Additionally, global trade contraction and supply chain restructuring may impact economic growth. The opportunities, however, lie in emerging market countries enhancing their global financial market influence and competitiveness by promoting the internationalization of the Chinese yuan, optimizing foreign exchange reserve structures, and strengthening regional financial cooperation.
In 2025, the global financial market is undergoing profound changes under the combined influence of Trump's tariff policies and Federal Reserve policies. In this transformation, countries must strengthen policy coordination and international cooperation to jointly maintain global economic and financial stability. For Asian countries, it is essential to continue adhering to reform and opening-up policies, promote economic transformation and upgrading, and respond to external uncertainties with a more resilient stance to achieve high-quality economic development.
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