Wow, where do we begin? Firstly, we would quite like to high-five our previous Week Ahead where we quite resolutely questioned and believed that President Trump would give in at some point. We were quite surprised that many other market experts were not convinced any longer that DJT was concerned by financial markets. And yet, the pain inflicted on Main Street, as much as Wall Street, did eventually induce a pullback in tariffs, and also in certain key sectors like smartphones, in a fresh exemption announcement on Friday.
Where does this now leave us? As we previously wrote, tariffs do not remove the underlying macro driver of the US trade deficit. As long as the US does not save enough to finance its own investment, it has to borrow from the rest of the world. And that requires it to run a trade deficit. Tariffs do not change that logic.
The major worry now is that markets have moved towards the “Sell America” phase – no matter what Trump does, investors are scarred (scared?) by the recent incredibly naïve and rather chaotic policy making and announcements – only exemplified by headlines like “How to crash your currency in five days” etc. A tumbling dollar is symptomatic of this, even as US Treasury yields head north. That is an extremely bad signal, and we will be watching the 5% level in the 30-year to see if that gets breached.
A glass half full stance does give us hope that as the Vix has eased back, so the guardrail of market sentiment and domestic growth has been activated on the US administration. We have admired Scott Bessent, the US Treasury Secretary for some time, and from here, it is now clear the likely direction of travel is towards negotiated bilateral deals that should continue to cool volatility. But a large dollop of sentiment damage is done and with inflation expectations higher and stickier than pre-tariffs, that means a weight on US real yields and the dollar remains, which at least is a good look for gold.
As we have written before, there is no playbook for this, as we haven’t dealt with this kind of protectionism to some degree in over a hundred years. Again, any US-Sino headlines will be key. Watch for Treasury yield moves higher even if the US roll back more tariffs and levies. International exposure to American assets is historically still high, so recent price action can continue for a while and become self-reinforcing. The weekend annoucements may help Apple and Nvidia for a short period, but uncertainty still abounds.