That was quick.
Shortly after capitulating on the China tariff pause, President Trump made an abrupt post on his social media that EU trade discussions "are going nowhere" and he is thus "recommending a straight 50% Tariff on the European Union, starting on June 1, 2025". Citing EU's "powerful trade barriers, VAT taxes, ridiculous Corporate Penalties, Non-Monetary Trade Barriers, Monetary Manipulations, unfair and unjustified lawsuits against Americans Companies", Trump blames these actions to have created an "unacceptable" US trade deficit of >$250B a year.
Just as markets were preparing for EU retaliation, the President quickly reversed course and agreed to extend the tariff deadline to July 9th after a phone call with the EU Commission President. So now we are back to square one versus where we were, except with the USD even under even more pressure to start the week.
At the risk of oversimplying things, if the US objective was to eliminate its trade deficit with trade partners, they are effectively asking the EU to make a 'payment' of ~$200B to gain access to the US market. That's obviously a price too steep to pay for most.
In fact, based on the work done by Citi, they actually see the 'Nash Equilibrium' outcome to be a 50% reciprocal tariff being levied between the US and EU, based on game theory outcomes.
In the case of Japan, the same analysis would suggest that Japan would be better off dragging out the 'No Deal' stance from their end, given the minimal net dollar impact on their exports. Ironically, a 'Full Deal' with the US based on the current terms might be the worst case outcome for them, so we shouldn't be surprised at a continued impasse in the foreseeable future.
Obviously, there are additional moving pieces to this that markets and economists are not aware of (eg. Rare earth dependencies etc), such as in the case with China, where the US appears to have fully capitulated and settled for the least-optimal outcome. Similar to Japan, economists estimate upside for China to come to a full trade agreement, with the optimal case to drag things out and hoping for more US concessions, which are happening. This is also the 'optimal' outcome for global macro. as the US retreats from forcing the global economy into a synchronized slowdown, with the USD taking the brunt of the hit and offset by gains in overseas equities.
Back on markets, outside of the dollar, the big loser was (global) fixed income, with the recent ratings downgrade, a disappointing budget outcome, and a series of weak treasury bond auctions have taken yields back to the highs of the recent range.
The double-whammy of higher bond yields and budget concerns caused the SPX to underperform its global peers and other macro asset classes, suffering its worst week since the beginning of April (-1.6%) with broad selling across every industry sector.
The recent US equity swoon is happening at a time where equity sentiment has rebounded to a frothy level, in particularly across the US, China, and European markets.
While growth stocks and real estate have the worst sensitivities to yields, gold prices have also suffered as higher term premium have dragged spot prices lower with geopolitical and recession tail risks having receded over the past month.
In the near term, we think the US budget and spending concerns are overblown, just like the recession slowdown risks before them, and the administration's enacted tariffs will soon bring significant revenues to government coffers, which should offset some of the near-term deficit concerns.
In contrast, crypto has been a real stalwart over the past 2 weeks, with Bitcoin prices outperforming US equities and bonds by ~15% over the past 3 weeks.
ETF inflows saw a net weekly gain of $2.75bln, the 3rd highest weekly draw in history, with Ethereum even seeing net gains to the tune of $248M on the week.
The passage of the GENIUS stablecoin bill was widely hailed as a key milestone in crypto development, albeit coming at the cost of increased institutional control and regulatory overnight, while moving further and further away from the OG decentralisation spirit.
BTC & ETH vol skews have returned to more normal levels with a bias returning to the upside, while implied vol has also perked up as investors appear to no longer be fading rallies and are bracing for a more sustained break to the upside.
In the meantime, (Micro)Strategy has announced their latest $2.1BLN at-the-market equity program (perpetual preferreds) to purchase additional BTC. With the macro environment continuing to be a tailwind, momentum appears to be on crypto side, and we believe that the recent price action has been structurally healthier with less momentum chasing. We see these confluence of factors to be more conducive to a sustained break to the upside and new ATHs to be reached in the weeks ahead.
Good luck & good trading.
