Did someone say Liberation Day? Or was it Liquidation Day?
Macro assets crashed across the board with the Nasdaq retracing nearly 25% peak to trough, and markets showing ominous signs of a modern ‘Black Monday’ with US equities trading down -4% this morning, and China/HK stocks trading down -9% as of the time of writing. This most recent leg of the sell-off was driven by China’s retaliatory action on the US (eg. Rare earths) but without announcing a domestic stimulus to offset. China announced a 34% additional tariff on all US imports starting April 10, with 11 US companies added to the list of “unreliable entities” amongst other retaliatory measures.
Are things quickly turning into a ‘race to the bottom’ to see who can take the most pain without folding to the other side? Has everyone gone ‘too far in’ to be willing to step back?
US equities are on track for the largest $ loss in history, with over $5 Trillion wiped out over the past few days and over $10T since inauguration day. But there was really no place to hide USDCNH spiked as devaluation concerns rose, JGBs saw a record rally with a -20bp move lower in yields, treasuries are now pricing in 4.5 cuts from the Fed before the end of the year (despite a Powell push-back), and ECB being priced for back-to-back cuts.
Investors are reacting as one would expect — by dumping whatever long exposures they have. Wall Street reports that long/short funds and equity prime books are showing some of the most aggressive selling and de-risking in recorded history, while JPM reported that US retail sold well over $1.5bln of equity exposure on Friday. We might be about to transition from the denial and anger phase to acceptance in the interim.
Funding pressures are starting to spread as well, with Citi’s ‘Keyrate’ indicator threatening to break to pre-SVB highs, and credit spreads are starting to widen out with Japanese and European bank stocks trading down -10% on Friday.
So what to look for in this sell off? We can do an entirely separate opinion piece of what we think the playbook is, but our bias is that this is one of the most coordinated administrations in history, and they have been extremely explicit about resetting the globalisation landscape since the beginning. We think Wall Street has been in denial to appreciate Trump’s conviction, (similar to how they missed the magnitude of Fed hikes) and they are finally coming around to really accepting this new era of new bi-lateral relationships.
“My philosophy, Mr President, is that all foreigners are out to screw us and it’s our job to screw them first.”
— Treasury Secretary John Connally to President Nixon, 1971. Credit for the quote to Yanis Varoufakis
For our younger crypto readers, many might think that this is the 1st time that the US administration has done something unreasonable in an attempt to re-jig the world order in their favour, but that is sadly not the case. History has shown that the US is willing to disrupt traditional allies to extend Americna dominance, or to accept short-term financial pain for long term economic power.
“A controlled disintegration in the world economy is a legitimate objective for the Eighties.”
— Paul Volcker during the ‘Volcker Shock’ as the Fed hiked interest rates into a global recession in 1982. Credit for the quote to Yanis Varoufakis
Remember when the Fed hiked the world into a recession which led to the lost decades in Japan in the 90s? Or how long Trump has been unhappy with the decline of American manufacturing since is ‘Art of the Deal Book’ in the late 80s?
“We’re a debtor nation. Something is going to happen over the next number of years with this country because you can’t keep on losing $200 billion (deficit at the time).”
— Donald Trump on The Oprah Winfrey Show, April 1988.
We have held a firm view that the Trump administration is extremely serious about this reset, with any semblance of ‘Trump puts’ being placed on treasury bonds, not equities. The first mission is to force long-dated yields to go lower to lessen the debt refinancing pain, through an economic slowdown and DOGE cuts. 10y yields have done the hard work as they have collapsed by over 80bp without the Fed committing to any dovish pivot. So far, so good.
With the US funding situation in control, the administration can now conduct more aggressive geopolitical policies to weaken the USD and to buy time and start a long journey to bring some US manufacturing back onshore.
We see the current phase of the plan is the ‘shock-and-awe’ phase, where it’s really not about the actual value of the trade deficit (ChatGPT caclulated or not, that’s not the point), but Trump is basically forcing everyone back on to the negotiation table on a bilateral basis. We are already seeing that happening with Vietnamese, Korean, and Japanese entities looking to make new bilateral arrangements with Trump, where he is confident in his own abilities to negotiate structurally advantageous deals on a one-on-one basis.
It was never about the trade deficit. Everyone knows that America cannot reshore tomorrow (or ever), but it has always been about renegotiating better deal terms in a new global order.
In the meantime, the economic impact on trade partners will force domestic central banks into their own FX devaluation or easing policies to support the economy, therefore lessening the inflation impact on US imports. In return for removing tariffs, we suppose that the US will likely ask for critical assets to be manufactured in America, for allies to purchase more munition exports, or to increase their core holdings in long-dated treasuries as a deal condition.
In the meantime, for unfriendly partners, the tariffs will bring some temporary revenue relief for the treasury as a form of tax income, giving the US some fiscal buffer to continue their aggressive negotiating positions.
Naturally, all of this doesn’t happen without risks. The administration is effectively betting that they will be able to devalue the USD against lower funding yields, balanced against a softening economy with a manageable level of stagflation without losing USD hegemony. The economic pain will be palpable, but waged against the bet that this brings structural benefits to the US in 18 to 24 months’ time. Furthermore, unforeseen and unexpected retaliatory actions from trade partners will present extra risks to this framework.
Markets are not going to like this uncertainty.
Given the balance of risks here, the Fed will not be able to cut rates aggressively or Ctrl-P a new round of QE unless it is acting in unison with more strategic moves and timing of the administration, and this policy interdependence is the unfortunate reality of the environment we are living in. As such, all the signs suggest that macro markets are now in ‘bear market’ mode, and rallies are to be sold, and investors will be forced to accept this new reality against the long-term wagers being made. This is not dissimilar to other nations who have advocated short-term perseverance in return for longer-term prosperity. Tougher times are probably ahead of us.
How about crypto? For a brief while, it would seem that BTC had decoupled from the global sell off as BTC held the 81k level on Friday while global equities cratered. Well, so much for that.
Crypto prices ‘caught down’ to the fall in equities as BTC gave up the $80k support, with Bitcoin falling about 9% week-on-week to $75k, and Ethereum collapsing by -18% over the same time. Liquidation picked up on Sunday with low liquidity, and any hopes of a BTC ‘store of narrative’ appears to be shelved for another day.
Over the longer-term, charts might argue that BTC has broken out against global equities and is over-due to catch-up with spot gold, but catalysts appear to be fleeting at this time and risk management (ie. Lower prices) will likely dominate until global stops melting down… Whenever that happens.
Global leaders have gone too far in their negotiating positions to have any realistic hope of any de-escalation in the meantime, so markets will be stuck to deal with all the surrounding uncertainties and market pain for now. The market will likely continue to frustrate and shake investor confidence for quite a while longer.
What if it all goes astray, with leaders continuing to escalate their trade tensions and asset prices becoming collateral damage? Is there anyone left with liquidity to bail things out in case things get much worse before they get better?
Funny you would ask that. The legend lives on…
It’s shaping up to be a very rough week ahead. Good luck to all our readers and stay solvent!
