Global business confidence fell sharply last week due to Trump’s unexpected tariff increase and China’s quick retaliation, according to Moody’s recent survey. This survey has been monitored for over 20 years by the firm.
Negative feedback surpassed positive responses for only the fourth time, a trend last observed during the Global Financial Crisis, the COVID-19 pandemic, and the U.S. banking crisis two years prior.
Recession Warnings
Moody’s cautions that if sentiment does not recover quickly, a recession could be on the horizon, estimating a 60% chance of downturn.
The sharp downturn in business sentiment follows abrupt changes in trade policy that rattled corporate expectations. In particular, the sudden imposition of fresh tariffs by the United States and the swift countermeasures from China unsettled global markets, prompting a wave of uncertainty. According to Moody’s, their long-standing survey shows a level of pessimism among global businesses typically reserved for extreme events in economic history. When we note that previous similar shifts in confidence coincided with the financial meltdown of 2008, the outbreak of the pandemic, or the regional banking scare in America, the current reading holds notable weight.
The 60% probability assigned to a future downturn is not a throwaway figure; it is slightly higher than the probabilities forecasted ahead of other moments of contraction, which provides a clear signal rather than a tentative one. What makes this outlook less hypothetical and more actionable is the combination of waning sentiment and deteriorating conditions across supply chains, credit availability, and investment appetite. Negative sentiment on its own can be dismissed if backed by fundamentals—but this time, it is increasingly supported by a downturn in hiring expectations and the drop in capital spending intentions we’ve observed.
Considering this, we should be prepared for short-term volatility in discretionary assets, particularly where risk-sensitive instruments have outperformed during the past quarter. The external shock from tariff escalation introduces further variability, and the timing—given the late-stage cycle many Western economies are now believed to be in—raises the stakes. Energy prices are also beginning to react, suggesting that we’re not the only ones factoring in broader spillover effects from tightened trade flows.
Portfolio Adjustments
From our standpoint, pricing in protection makes sense. We’ve begun moderating our duration exposures, especially in higher-beta segments, while maintaining enough liquidity to capitalise on wider bid-ask spreads expected in the near term. Repricing in option markets reflects this as well, with implied volatilities lifting beyond historical averages for the month.
Powell’s recent remarks, though not addressing tariffs directly, showed renewed caution and referenced tighter-than-expected credit conditions. That, together with Jackson’s take on global supply resilience, outlines a policy tone that — if not reactive — is unlikely to support additional loosening in the near term. Neither are inconsistent with past cycles where monetary flexibility diminished as inflation risks coexisted with growth uncertainty. This matters heavily for leveraged derivative positions and allocation strategies tied to anticipated rate shifts.
In the background, there’s also geopolitical risk that typically gets underpriced when macro data rolls in smoothly. That’s clearly no longer the case. The fact that bond spreads are beginning to reflect this softening sentiment before official GDP figures change direction places us at a rare juncture where market reaction leads fundamentals.
Given this shift in directional indicators and the historical rarity of such a dip in sentiment, we would adjust portfolios accordingly. Strategies relying on tight spreads or low volatility should be reviewed. It is very possible that normal hedging ratios may not provide sufficient cover under current trajectories.
