Pause?… or Not.

Pause?… or Not.

I am going to start this week’s newsletter by saying that we have seen events that have made history, in the last 2 weeks. Now, we say it is all about experiences and that eventually what doesn’t kill you makes your stronger. As an active market participant for the last 17 years, this price action reminds me of 2008-2009 a lot, not based on the magnitude but the velocity and uncertainty behind these market moves.

So where do we start first? Tariffs obviously have been the main event of the week with headlines consistently coming out from the US administration. There are so many which I don’t know where to start from, so I am going to concentrate on the end conclusion. The US administration has paused the reciprocal tariff regime for 90 days, away from China. The relationship between China and US is being tested with escalation in tariffs daily. I believe we are now in the region of 145% US tariffs versus 125% Chinese retaliatory tariffs. In all essence, if these levels stay to this extent, trade between the 2 countries will diminish massively. On the positive note, post an abrupt move wider in the Treasury government bond market, which seems to be the only place that President Trump is taking note, we saw a change of narrative by the US administration, allowing Steve Bessent to be the front face of the negotiations across business partners. The move higher on the equity side was so violent (+10% overnight) which shows that there is so much pain either way given to the excess volatility. My guess is that we will see soon some of those deals coming upfront and I hope that the market at least in the short term will take some more clarity of what the US administration plans are with regards to tariffs. The equity markets have seen some enormous volatility this week, not seen from 1987, and there is saturation and tiredness in the market with trillion moves becoming a daily event! In terms of price moves, we are ending the week, up between 3-5% in the US equity indices and down between 1-2% on European Equity indices.

On the bond side, we saw for the first time last week credit cracking wider with decompression playing through. The lower part of the financial capital structure and generically the HY market was 30-50bps wider in the week. On the sovereign bond side, Treasuries traded in 50bps range with abrupt moves wider on Wednesday morning. More and more talk of foreign sales of US treasuries exacerbated the moves in yields and from what it seemed this was a valid pressure point on President Donald Trump. Just to make a note here; from liberation day the S&P equity index is down 8%, whereas the US Treasury 10yr government bond is 28bps wider. Bear in mind, the US administration has been quite vocal with regards to lowering Treasury financing costs, something obviously that the market has not agreed with given the lack of certainty in holding US assets.

The next point I wanted to discuss was the USD currency. EURUSD is currently at 1.1341, a 10%  appreciation in 2 months. The reason I am mentioning it here is that for the first time at least in my tenure, I have seen a notable risk asset sell off without USD dollar appreciation as a haven asset. Now, the market is preferring as safe heaven assets both the EUR and JPY currencies along with other alternatives such as Gold. Gold is currently trading in the $3220 context per ounce, and it is the clear winner in terms of performance in the last 2 months or so, up 23% year to date. (see below graph)

In terms of data, we saw the US CPI coming lower than expected across both the core and headline number. The market did not really give any necessary attention to it as of course this shows a deflationary process but given the questionable effects of tariffs, the trajectory of forward inflation is unclear.

Looking ahead…

Going ahead, it is all about the running negotiations of the US administration across different countries and the retaliatory tone between US and China. Current tariff levels break any model that would try to predict the effect of trade disruptions that we may see in a global perspective. My view here is that this is the start of a long-time negotiation process which will disrupt growth and the real economy in a significant manner. The magnitude of that is a function of the time needed to anchor the new trade expectations by the real economy participants. We remain very vigilant in identifying dislocations in the current market set which provides a good trading environment in the short term.

Written by: Michael Konstantinou, Senior Portfolio Manager