Choppy Trade As Participants Seek Shelter From Tariff Storm

WHERE WE STAND – Let me preface this note by saying that, despite my penchant for puns, today’s note contains nothing by way of Aprils Fools’ Day jokes. It’s already difficult enough to work out which headlines are real these days, without having to deal with that nonsense too!

In any case, yesterday proved to be a relatively risk-off, if choppy, start to the week, as market participants very much picked up where they left off on Friday, continuing to trim exposures to riskier assets, and seek shelter in havens, battening down the hatches ahead of the impending tariff storm.

Put simply, most participants have no other option at present but to reduce their exposures, with nobody wanting to have to explain to their risk manager why they were the fool that didn’t hedge tariff risks into what’s been such a well-publicised deadline.

This continued flight to safety, predictably, saw equities take another leg lower across the board, with red on the screen pretty much everywhere one looked. Most European bourses slipped by well over 1%, with headwinds here also stemming from the market continuing to price the impacts of President Trump’s 25% auto tariffs announced last week. Across the pond, stocks on Wall Street endured an incredibly choppy session, with both the S&P and Nasdaq 100 trading around 2% lower intraday, before paring declines, likely by virtue of chunky EoM/Q rebalancing flows.

Despite the intraday rally, I remain bearish on risk for the time being, still favouring a rally selling strategy. As I mentioned yesterday, participants seem somewhat too complacent on the tariff front, seemingly seeing Wednesday as a ‘one-off’ event, with the SPX vol curve spiking higher in the near-term, before normalising very quickly indeed.

Instead, I view this more as the beginning than the end of the tariff saga, with countries across the globe now set to either retaliate with tariffs of their own, or seek to make concessions in an attempt to persuade Trump to remove, or lessen, the tariffs that have been imposed. All of this, naturally, will lead to the current elevated level of uncertainty persisting, or even ratcheting higher, for some time to come – long noise/short signal is the nub of all this, translating to long vol/short risk from a trading perspective.

As that uncertainty persists, business and consumer confidence both seem set to weaken further, further amplifying downside growth risks. At the same time, the lack of clarity will see it remain near-impossible for market participants to price risk, especially with there being no ‘Fed Put’, ‘Trump Put’, or any other kind of comfort blanket to reach for.

While that may all seem rather depressing, I’m not about to become some sort of perma-bear peddling doom at every opportunity. In fact, the longer-run outlook for the US economy should be a very solid one indeed, if the Trump Admin are, as promised, able to effectively trim the size of the federal government, and reallocate resources to the private sector, sharply boosting productivity as a result. To buy the dip in the short-term, though, requires much more certainty on the tariff front, and much more coherence in terms of how the White House is making policy.

Back in the ‘here & now’, yesterday was mostly a ‘classic’ risk-off day, though some moves did pare as US trade progressed, likely as some operators rushed to complete some month- and quarter-end rebalancing.

As such, Treasuries gained ground across the curve, led by the long-end, with benchmark 30-year yields trading as much as 6bp lower intraday – this is a move that I’m happy to ride, with the risk/reward still favouring the bulls. The same could be said of gold with the yellow metal surging to fresh record highs north of $3,100/oz, with momentum favouring further upside here, especially given sizeable EM central bank buying flows which continue as those institutions seek to diversify their FX reserves.

The dollar also advanced on the day, with the DXY reclaiming the 104 figure, albeit remaining well within recent range, with this dollar demand also taking the EUR back under 1.09, and cable back beneath 1.29.

I’d argue, though, that this upside owes more to the aforementioned rebalancing flows, than any haven demand, particularly with the greenback the most exposed of all currencies to the zero-sum game of trade wars, and the most vulnerable to the continued incoherence emanating from the White House.

LOOK AHEAD – Tariffs will, unsurprisingly, remain centre stage today, as we inch ever closer to ‘Liberation Day’ tomorrow.

Before that, though, focus today will fall on the various reports from federal agencies, which are due to feedback to President Trump on their investigations into US trading relationships, which got underway on Inauguration Day. Whether or not these reports feed into the reciprocal tariff decisions remains to be seen, with the exact form of this information also unclear. In any case, with markets remaining highly sensitive to trade headlines, the release(s) will be watched very closely indeed.

On the data front, today is all about manufacturing PMI surveys. This afternoon’s US ISM manufacturing survey stands as the most notable release, with the index seen falling back into contractionary territory, at 49.5. Focus will also fall on the employment sub-index, and on the February JOLTS report, ahead of the March jobs report due on Friday.

Elsewhere, last month’s ‘flash’ eurozone inflation figures stand as today’s other notable event, with headline CPI seen rising 2.2% YoY, and core CPI expected to have risen 2.5% YoY. These figures, and later remarks from ECB President Lagarde, drop as markets discount around a 65% chance of a 25bp cut later in the month.