The Trade War Waiting Game Goes On

WHERE WE STAND – I must admit to feeling rather uneasy at present.

Markets appear becalmed, for the time being, with news flow on the tariff front having slowed somewhat in recent sessions, allowing both implied and realised vol to subside as well, and generally calmer tones to prevail across the board. I won’t use the ‘Q’ word, at risk of tempting fate, but things have become somewhat more subdued.

That said, it is quite obviously too early to sit here and sound the ‘all clear’. Sectoral tariffs on computer chips, and pharmaceuticals are on the way; a 10% blanket tariff is still in place on the vast majority of US imports; Sino-US trade is still essentially blockaded, with China having now halted deliveries of Boeing jets; and, even if it’s still early days, progress towards trade deals to eradicate the ‘reciprocal’ tariffs altogether seems rather slower than most would like.

Consequently, I remain concerned that participants are being lulled into a bit of a false sense of security here. Not only does ample trade uncertainty remain, but we have also yet to fully discount either the upside inflation, or downside growth risks that tariffs will bring, to the US economy, and globally. Furthermore, the threat of a tape bomb in the form of a Trump ‘Truth Social’ post continues to lurk around the very next corner, which in turn continues to cap conviction among market participants, given that the entire outlook could be upended – yet again! – with just a few words.

Anyway, equities ended yesterday as near as makes no difference unchanged, though I remain a rally seller given how earnings growth expectations continue to look rather lofty, and how the market has yet to account for the elevated degree of prevailing uncertainty. A reality check could well be in order on Wall Street before too long.

That description, though, does broadly summarise the price action that we saw elsewhere yesterday.

Treasuries rallied, led by the belly of the curve, however it remains far too soon to say that capital flight out of the US has come to an end, with these sort of changes panning out over months, rather than a few days.

The same can be said of the USD, which rallied against most peers, as the DXY reclaimed the 100 handle, even as incoherent policymaking from the Oval Office continues. I remain a USD rally seller, given this uncertainty, and taking into account that the buck is acting as anything but a safe haven right now. Tariff uncertainty obviously hasn’t gone away, and probably won’t any time soon. Nor will capital that has fled the US be coming back in any particular hurry.

LOOK AHEAD – While there’s a few things of interest on today’s calendar, focus will likely remain on the trade front, and any notable tariff headlines that may cross news wires.

Anyway, in terms of the data docket, the latest US retail sales print stands as the most notable release, with sales set to have risen 1.3% MoM in March. The data is of particular importance given ongoing worries over the state of the US economy, and the recent plunge in consumer sentiment, which may well feed through into consumers having tightened their belts more broadly.

Elsewhere, Fed Chair Powell speaks this evening and, while likely to stick to his recent script, the remarks will be closely scrutinised given how drastically the macroeconomic outlook has shifted since Powell last spoke around 10 days ago. Powell’s focus, though, should remain on ensuring that longer-run inflation expectations stay well-anchored, with the ‘Fed put’ strike price still some way below where we currently trade.

Besides that, the latest UK and eurozone inflation figures are due, though neither should deter the BoE or the ECB from cuts at their next policy meetings. A 20-year US bond auction, plus March’s industrial production figures, a likely unchanged decision from the BoC, and earnings from ASML, round out the data docket.