How do we follow last week’s historic announcements and market ructions? It’s often tough to gauge price action when we are sat squarely in the middle of parabolic price action. Certainly, the unpredictability of US President Trump means trading plans, preparation and homework are being put to the test constantly. But those tools are crucial in the current environment, when understanding your risk, position sizing and keeping your discipline is key. Headline risk is exceptionally high at the moment, and it’s important to remember in times like this that oversold and overbought can also mean very little.
Regarding the economic issues around the recent announcements on Liberation Day, ultimately, 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. We will leave others to discuss the merits of levies on US imports at punitive levels not seen since 1908.
Betting markets now see the chances of a US recession above 60%. Annual inflation could rise above 4% by the end of 2025 which would keep interest rates high for longer. That said, money markets have fully priced in a June 25bps rate cut, with the odds of move in May given a one in three chance and four quarter point moves seen in 2025. The Fed is definitely in a tough spot, as it increasingly weighs up stagflation – high inflation and low growth. All the while, stock markets are crashing with uncertainty high and confidence shot.
So, how much of a “detox” is the Trump administration prepared to endure? Put simply, what transitional pain is deemed too much – 5,000 on the S&P 500? Or are the announcements a transactional lever, as the White House waits for countries to pick up the phone and strike a deal? With the VIX high above 40, selling USDJPY makes sense as a US recession and US yield proxy. The euro has held up, but the more stocks sell off, the more liquidity issues come to the fore which means USD becomes more popular. That is especially true if investors exit the crowded European equity trade in haste. As we wrote last week, will the damage and retaliation have been done by then, to force an about-turn by DJT?
There is no playbook for this, as we haven’t dealt with this kind of protectionism in over a hundred years. We will be sticking to opportunistic trades, with likely smaller position sizes due to “headline havoc”. We will definitely be on the look out for retaliation, deals being talked about and hopefully agreed, though the longer these take, the more inflation and growth uncertainty rises, hurting the economic outlook ahead. This also likely means that the Fed will be behind the curve as it remains patient, so reactive rather proactive, which isn’t great for stock market bulls.