Trade policy uncertainty has increased and is expected to continue, influencing global GDP. Projections indicate a potential decline of 1.0-1.5%, largely stemming from reduced output in the US and other major economies.
Three channels are identified through which heightened uncertainty may impact global growth: decreased trade and capital flows, diminished business investment, and reduced consumer confidence. The overall effect on growth may be less severe due to counteracting measures by nations.
Impact On Emerging Markets
Analysis of emerging market economies shows a minor short-lived decline in output and consumer price index as a response to rising uncertainty. Some currencies, such as the Mexican peso and Indonesian rupiah, may weaken due to factors beyond trade policies, instead linked to central bank credibility.
In light of this, we’re now looking at a scenario shaped by disruptions that have already begun to affect output across several key economies, particularly in North America. The expected global GDP slowdown of 1.0–1.5% is not being driven by a single region, but rather by overlapping effects—most notably a hesitancy among firms to commit capital, consumers scaling back on discretionary spending, and tighter cross-border flows of investment and goods. While the projected contraction appears modest on the surface, for markets tasked with pricing future volatility, movement and volume, the impact is anything but.
From the investment side, firms are delaying expansion plans. This tells us sentiment is softening long before it shows up in headline data. That lag can be informative. Consider it a heads-up embedded in the mechanics of long-dated contracts: a flattening curve in rates or commodities is often the earliest signal of withheld supply or demand. Business responses are just one input, but in risk-sensitive markets, they carry more than their weight. For those of us watching changes through futures or options, this is where open interest and implied volatility begin to reflect caution or opportunity—even in the absence of overt macro signals.
Meanwhile, some of the downward pressure in emerging markets has been exacerbated not just by uncertainty in trade policy itself, but by how much trust local policy frameworks are able to command. When currencies like the peso and rupiah react more sharply than peers, the price action hints at something deeper than just tariffs or quotas. Traders adjusting their hedges might not consider sovereign credibility directly, but the pricing implies they should.
Divergence In Policy Response
Looking at the typical reaction function in EMs, historical data suggests that these hits to output and inflation are often brief—though not always symmetrical. This matters especially when volatility is being re-priced; shorter lags favour momentum strategies whereas longer, uneven recoveries might leave options mispriced for weeks. Derivatives linked to inflation or FX in these regions may offer asymmetrical setups—some of which could remain under the radar in the early stages of a pullback.
On the broader macro front, the fact that some economies are deploying measures to offset the shock does add an additional dimension. This creates divergence in policy responses. Offline fiscal support or rate intervention, even if undeclared, can create distortions that seep into forward pricing. The key, then, is to dissect where those interventions are likely to be announced versus where they’ll be delayed or politically constrained. The value lies not in the announcement, but the lag between expectation and confirmation—is it priced in or not?
Policy moves, whether actual or anticipated, will ripple through derivatives markets well before spills are seen in wider equity or bond trading. Hence, eyes on forward indicators from central banks, closely watching cross-asset volatility metrics for any persistent misalignment. That’s where we might find relative value in spreads that are at risk of breaking from historical mean-reversion patterns.
Overall, movements in GDP projections have led us to focus more on positioning rather than direction. It’s not whether things will get worse—it’s about when, where, and how much is already reflected in the curve. Dislocations don’t always shout; they often whisper from gamma skews and volume tails. Let’s watch those carefully.
