The SPX ended last week with its first nine-day winning streak in over 20 years, closing at the highest price since late price and clawing back all of its losses since the ‘Liberation Day’ crash, as the administration dialed back some of the rhetoric on its most hawkish trade policies.
Both China and US continue to make baby steps towards reinitiating trade talks to thaw relationships, with both sides recently shaking up their trade ministers and negotiating staff, and China asserting that the “US has recently sent messages to China through relevant parties, hoping to start talks with China,” and that “China is currently evaluating this possibility”.
A recent Bloomberg survey suggests that participants now expect the Trump administration to be ‘market sensitive’ afterall, despite earlier attemps to shift the blame as “Biden’s economy”, and that we’ve reached the pain threshold for Trump to dial down his tariff threats.
Outside of trade positivity, a surprisingly resilient NFP report on Friday propelled the risk-on move higher, capping off a week of robust data that suggests the US econ remains in good shape despite the negative sentiment. April added 177k in new jobs with the unemployment rate steady at 4.2%, negating any concerns of an imminent recession, though the ‘true’ impact of tariff decisions might not be felt until the May-June figures.
Furthermore, the equity recovery now suggests that the market is pricing in just ~8% of a recession, based on the average drawdown from previous slowdowns, significantly lower than economist estimates or what is implied through fixed income markets.
In fixed income, yields have retraced back to their February levels in a curve flattening move, as markets are back to price just ~30% chance of a June cut and ~3 moves by year-end.
On the other hand, the recent drop in actual inflation data and positive assurances from foreign CBs on maintaining their treasury holdings have returned a sense of normalcy back to US bond markets.
Crypto prices were flattish over the uneventful week, though BTC did manage to reclaim the 96k level at one point before seeing short-term profit taking pressures. Vol smiles are as flat as they have been in recent memory (no conviction on either side), while realized volatility has receded to the lowest levels YTD.
Without an unforeseen spike to macro assets either way, we expect crypto prices to stay muted in the foreseeable future, with a small bias to the upside over the medium term.
ETF inflows have been small but consistently positive over the past 2 weeks, with cumulative inflows almost surpassing the record highs seen earlier in Q1.
Looking ahead, the ‘easy’ part of the bounce has been realized with SPX closing the post Liberation Day gap, and prices moving well back into a heavy technical resistance zone. ‘Bear market’ bounces, should this be one, are historically the most volatile and irrational to observers, but the speed of this rebound has also triggered some positive divergences which could pull prices back to January highs.
We don’t expect the FOMC this week to be a market moving event, and have no strong conviction at this point and think it’s coin flip on where prices go. Ultimately, it’ll depend on earnings growth, which will be a further function of the economic realities and post-tariff aftermath.
So far, so good. Q1 earnings growth is now expected at nearly 13% yoy, almost double the pace that was expected entering the earnings season, and marketing the 2nd straight quarter of double digit gains.
Gun to our head, we think pain trade remains higher prices as most observers are still largely stuck on “what’s done cannot be undone” with regards to tariffs. Dead cat bounces in bear market rallies are not to be trifled with!
