Back to red

Tariff-pause optimism didn’t last long. Although the European markets followed the US to the upside, mood in the US turned increasingly sour and led to another wave of selloff as the trade war escalated with China. China announced to restrict the US movie imports and the US increased its tariffs on Chinese goods to 145%. The S&P500 gave back 3.50%, the tech-heavy Nasdaq tanked more than 4% as Dow Jones fell 2.5%, shedding more than 1000 points. On the individual level, Disney lost 6%, while the owner of Temu, PDD, lost a similar amount. Gold soared past the $3200 per ounce!

The futures are slightly positive this morning but note that the US selloff accelerated after the European close so there should be a certain catch up today. Broadly the direction remains pretty clear – big jumps are as disquieting as big selloffs; a 3-4% rebound for an index is hardly sustainable when investors remain worried about the trade war uncertainties, the potential impact on the economic growth, on inflation and on jobs.

And this is the message that investors emphasized yesterday. The broadly softer-than-expected US inflation data hardly saw any positive reaction from the markets. The data itself was unusually weak. Both headline and core inflation came in softer than expected on a yearly basis. And on a monthly basis, the headline CPI printed a negative number for the first time since July last year, services excluding housing and energy also fell. The latter would normally boost the dovish Federal Reserve (Fed) expectations and risk appetite. But not this time. The US 2-year yield remains under pressure due to the rising bets that the Fed will soon step in, but the latter doesn’t necessarily bring appetite along. In fact, the tariffs are expected to fuel inflationary pressures and limit the Fed’s action scope. Amazon, for example, warns that US consumers will see the tariffs passed on to them.

Stress in bonds is bad, bad news

The fact that the volatility spreads into the government bond markets is not good news because it hits the pockets of the market that you (as a government) want to keep safe – like the pension funds for example. Therefore, I believe that if Trump backing down won’t calm bond investors’ nerves, the Fed will be the next to step in. This is what the Bank of England (BoE) did this week: they temporarily stopped the sale of long-dated bonds in their QT program to ease the pressure on gilt markets. In the US, we haven’t yet seen an encouraging stabilization across the treasury markets following Trump announcement. The US 10-year yield rebounded back to 4.45%, while the 30-year yield is consolidating below the 5% psychological mark. Investors also flee the US bonds on fear of exploding debt due Trump’s tax cut plans. This week the US Senate passed a budget plan that clarifies parameters on tax cuts and debt ceiling increase. Bloomberg estimates that the changes could allow the US government to deliver $5.3 trillion worth of tax cuts over the next decade and rase the debt ceiling by $5 trillion. Tax cuts are good for corporations and valuations BUT if the yields must rise in return, the positive impact will be thrown under the bus.

Today begins the US earnings season. Big banks will open the dance with their Q1 earnings and projections - amid trade uncertainty and severely deteriorating growth projections - will take the center stage and shape investor sentiment. The forecasts will be revised lower, but how low remains to be seen. TSMC for example reported stronger-than-expected sales in Q1, sales increased by a whooping 42% - the fastest since 2022. Normally, such an update would boost appetite for Nvidia – and it certainly limited losses – but Nvidia closed the session nearly 6% lower as no one knows if Taiwan would avoid import taxes even with TSMC’s pledge to invest up to $165bn in the US. I guess we will see...