Uncertainties persist, but Treasury pressure remains manageable

Markets kicked off the week on a positive note on relief regarding the consumer electronics tariffs – that will not be exempt but will be part of a different ‘tariff bucket’ (20% instead of 145% for those made in China). Then, there was some relief for auto and part makers, as well. As such, the European stocks rallied 2.70% on partial rollback of the tariffs, the US stocks kicked off the week higher,but euphoria weakened into the session end on news that the US Commerce Department launched a probe into chips and pharmaceutical imports on national security reasons. The S&P500 closed the session 0.80% higher, while the tech-heavy Nasdaq couldn’t keep more than 0.57% of this advance. Apple jumped nearly 7% at the open but ended the session 2.20% up, while Nvidia was up by almost 3% at the open but closed -0.20% lower despite announcing half a trillion worth of infrastructure investment with its bodies including TSM. TSM – on the other hand – that’s preparing to announce its Q1 results this week - closed 0.80% lower.

This morning, the futures are flat with Nasdaq futures under pressure. Sentiment is fragile on bipolar announcements from the US that’s taking a toll on companies’ and investors’ ability to make decisions...

... except for China! China this week makes the decision of not reacting anymore (which I think is the best option because I myself deal with a 4 and a6-year old everyday) Instead of responding to the US, China’s Xi visits Asian counterparts to convince them that whatever they will negotiate to avoid US tariffs – it won’t be stable enough than sealing a deal with China. Appetite for Chinese stocks remain limited with the CSI 300 near flat today and the Hang Seng index giving back early gains.

One man’s misery is another’s fortune. Volatility helps trading desks post shiny revenues. Goldman Sachs yesterday announced its best revenue for equities trading in history. Traders there made $4.2bn as clients adjusted portfolios in response to tariff-induced market swings.

We’ve seen worse

Uncertainties persist but the good news is that the pressure on the Treasuries front remains bearable – and that is one place to watch carefully to judge how dangerous volatility gets. The US 2-year yield eased to 3.85% on expectation that the Federal Reserve (Fed) would better intervene than not to keep the US economy afloat through the storm, while the 10-year yield eased to 4.35%. We are substantially above the 3.80-3.90% range of a week ago, but the easing tensions hint that the selloff across the stock markets could stabilize, as well. All that – of course – under the assumption that Trump doesn’t say anything extravagant.

If you want ultimate protection, gold is there for you at around $3230 per ounce level. Is it too high to buy? Yes, it’s relatively high. If we look at the mint ratio - the ratio between gold and silver – it spiked above 100 during last week’s risk selloff. This ratio normally trends between 60 and 80, and rises when growth expectations are cooling because silver is more tied to industrial demand, so it's riskier and more cyclical. Therefore, yes gold is valued at around 100 times the same amount of silver, and Goldman expects the price of an ounce to hit $4000 by the middle of next year. It’s high, but what’s high if China (and others) were to replace their treasury holdings by gold?

Speaking of waning growth expectations

OPEC joined others in announcing further cuts to its global demand forecast this year and the next on tariff uncertainty. They lowered their projections by 100K barrels a day for this year and the next and predict that demand will grow by 1.3mbpd (or about 1%) over the next two years. That’s still significantly higher than other agencies. EIA for example dampened its own growth forecast by 30% to 900K bpd, while GS sees demand rising by only half a mbpd. US crude is better bid after last week’s short crash to the $55pb level but risks remain tilted to the downside with the next natural target for the bears standing at the $50pb.

In the FX

The more the US shakes the world with tariffs to get richer, the more the rest of the world dumps the dollar. The greenback remains under a decent pressure on waning growth expectations. Growth expectations are pulled lower everywhere – even in Germany that will benefit from massive defense and infrastructure spending – but the pace of deterioration of the US expectations are faster. As such, the dollar index consolidates below the 100 level this morning – the lowest levels in three years. The EURUSD remains bid above 1.13, Cable extends gains above 1.32, probably also fuelled by better than expected growth data of last Friday, the USDCAD sank below the 1.40 level and its 200-DMA last week despite the falling oil prices while the USDJPY consolidates near 142-143. The price rallies are interesting opportunities to strengthen short USDJPY positions on expectation that the Bank of Japan (BoJ) will remain supportive of the economy in the changing geopolitical spectrum.

Today, Canada and France will release their latest CPI updates, while German sentiment index and Eurozone industrial production are expected to come in soft enough to cement expectations that the European Central Bank (ECB) will cut the rates by 25bp this week and a few more times in the coming meetings if inflation remains under control. If that’s the case, the softness of the data could be good news for the euro and the European stocks.