Liberation Day

Liberation Day

President Trump has been seen in the press in the last few days, naming 2nd of April as the “Liberation Day” as he is planning to impose reciprocal tariffs to all nations across products. What remains to be seen is the actual implementation of those tariffs and which sectors are going to be heavily affected across both sides of the Atlantic.

So far, the rhetoric of tariffs is leaning against the European Union and on Wednesday evening we got the first example. President Trump signed a proclamation to implement a 25% tariff on auto imports which will come into effect on 3rd of April, initially targeting fully assembled vehicles. Both EU and Canada which are mainly affected by these set of tariffs categorically responded with potential retaliation plans, while the US political cabinet pledged for harsher punishment in case of a co operation against the US. The fact is that the overall market is quite complacent on the trajectory of risk assets as political uncertainty lies at elevated levels. Any redistribution of risk and allocation in to under performers is going to take place once there is more clarity on US tariffs and by default, the extent of a potential trade war. As you can imagine, global equities traded weaker with German equity indices under performing given the current weight automakers have. (see below graph)

This week was supposed to be all about data with European PMI’s coming slightly higher than expected but with manufacturing still providing a drag especially for Germany. In the UK, headline CPI came lower than expected,2.9% y/y vs 3% y/y, providing some relief for UK government bonds. At the time of writing this newsletter we are waiting for US Core PCE numbers late on Friday, the favorite gauge on inflation by the FED, which will give an indication of the inflationary rhetoric in the US. The reality is though that all this soft/hard data are taking a back seat in terms of market interpretation, as the US political agenda may distort the macro perspective across the globe. The US cabinet is adamant that through tariffs they will raise an implicit tax revenue which will a) increase manufacturing in the US and b) increase government revenues to enable them to act on further tax cuts and deregulation. The Congressional Budget Office has also pointed out that if there is no further roll out of the US debt ceiling (i.e. allow the government to borrow more by issuing US government debt) there is a risk that the Treasury may default on some of their payments by August. As we stand today, the current administration is in the process of imposing tariffs to raise revenues, roll out the debt ceiling, cut US taxes and deregulate banks, all in the space of 2 months of being in charge. The amount of new information that the market receives daily provides some saturation which implies more risk aversion. Nevertheless, these are the times that market dislocations take place and active management perspectives thrive and hopefully provide good risk adjusted returns in the medium to long term.

In terms of market moves, the winner of the week was Gold, trading as high as $3051 per ounce, up 6.02% for the month and 16.29% YTD. Investors are rushing to get alternative hedges given the high levels of uncertainty in the short term. EURUSD felt a bit more offered this week, trading around the 1.075-1.8 context, around 1% lower than the recent highs. 10yr German government bonds are anchored in the 2.90-2.75% context for now with 10yr Treasury government bonds trading around 20bps wider from the recent tights, currently at 4.39%. The US-German 10yr government bond spread currently trades at 162bps, 24bps wider form the recent tights. (see below graph)

Looking ahead…

Next week we have European and German CPI numbers coming out along with US Non-Farm Payrolls on Friday. Obviously, the market awaits a series of tariff announcements on the 2nd of April which will redefine the dynamics of the market and where we are heading in the short term. There are a few different schools of thought with regards to the risk asset trajectory, I am more inclined to believe that there is more pain ahead due to the simple fact of market participant psychology. The further this political uncertainty drags the higher the risk aversion; so, the pain trade is to drift lower in valuations. We remain relatively balanced across our allocations in risk assets with a hefty cash balance ready to react to dislocations in the market.

Written by: Michael Konstantinou, Senior Portfolio Manager