Too early to call the end of the US selloff

The week started on quite a positive note on hope that the next wave of US tariffs – expected to hit the ground on April 2nd - would be more targeted and more measured than previously thought. But Trump still threatened to impose 25% levies on countries that buy oil from Venezuela.

Chinese equities are under pressure this morning as the country buys oil from Venezuela and is concerned by the new tariff threats from the White House. And the barrel of US crude gained around 1.30%, though offers weighed heavier into the $69.5pb mark. Trend and momentum indicators are growing stronger, hinting that a rise above the $70pb is increasingly possible in the short run. But the long-term demand and supply dynamics remain in favour of cheaper oil – an expectation that’s already priced in, but could still prevent oil bulls from gaining too much traction after a potential break of the $70pb resistance.

Risk-on?

In the US, the low-risk assets including gold and treasuries sold off on Monday while equities gained. The S&P500 jumped 1.76%, cleared the 200-DMA resistance and closed the session above this level, Nasdaq 100 rallied more than 2% and one of the most severely hammered stocks of late, Tesla, rebounded almost 12% despite the news that its biggest rival BYD earned more than $107bn in 2024, more than Tesla ($97.7bn). BYD’s profit jumped 34% to around $5.6bn but remained short of Tesla’s $7.1bn. That’s perhaps why BYD investors preferred taking profit on the back of good and better-than-expected results, along with the fear of more tariffs on Chinese goods. But given the tariff story is hard to price in, the price pullbacks for a company like BYD are certainly interesting opportunities to strengthen long positions. As per Tesla, the latest numbers continue to look bad: the company’s European sales fell by 40% in February...

Elsewhere, the US small and medium cap indices gained more than 2% while the European indices were under pressure with the Stoxx600 retreating 0.13%.

Overall, Monday saw a correction of the rotation trade that hit the US equities and boosted the European and Chinese equivalents so far this year. Whether it’s the beginning of the end of the rotation, or just a correction is yet to be seen. The fact that the Federal Reserve (Fed) showed support despite the tariff-led inflation worries, and the fact that the European and Chinese stimulus news have already been priced in increase the need for new ingredients to keep the rotation on track. Note that the S&P500 tipped a toe into the correction zone by posting a 10% selloff from an ATH level earlier this month but avoided a further fall into that pit. Equity strategists at JPM, Morgan Stanley and Evercore ISI now think that the worst of the US market downturn is already over. Yet April 2nd will be the next important test for the global markets depending on the announcement of reciprocal tariffs - which will probably upset more than one. US and European futures are all slightly in the negative at the time of writing.

In the FX

The dollar index benefits from a broad-based rebound on relief – or fatigue – from the tariff talk. The EURUSD shortly retreated below the 1.08 mark yesterday despite a set of stronger-than-expected manufacturing PMI numbers from France and Germany thanks to the expectation of massive infrastructure and security spending, while services PMI came in lower than expected. But if we compare the two, manufacturing has a higher multiplier than the service-led spending, hence the latest PMI numbers are encouraging.  

Across the Channel, the numbers tell a different story. The contraction in the manufacturing activity accelerated while services expanded faster. British inflation and the spring budget announcement will be the biggest drivers of sterling later this week, and there is a chance that we see sterling softer by the end of the week than otherwise provided that Rachel Reeves has no choice but to cut her spending plans. The latter would be negative for UK growth expectations and sterling if the Bank of England (BoE) doesn’t step in to compensate. And the BoE is not in a hurry to give support when global and trade uncertainties loom. In other words, the 1.30 resistance could be hard to clear for Cable, unless the US dollar experiences another selloff.