De-Risking & Haven Demand Set To Persist

WHERE WE STAND – It’s all getting a bit grim out there in the financial markets. But hey, at least the sun’s been shining here in the City!

Huge Government policy uncertainty, a Fed being kept on the sidelines by stubborn inflation, softening macro data, and a Trump Administration doubling-down on the hawkish rhetoric on all fronts.

That’s a pretty toxic mix, and one which makes it next-to-impossible for market participants to accurately price risk. It’s also a mix which, contrary to conventional wisdom over the last few years, is making the US one of the most unattractive markets across DM.

Against this backdrop, it’s easy to see why the buck has gone from ‘best of the bunch’ to ‘don’t touch with a bargepole’ in the blink of an eye. When the dollar bull case rests on the US economy continuing to outperform its peers, then incoming data softens, and folk in the White House try to shoot themselves in the foot by slapping tariffs on the US’ closest neighbours, it’s not exactly surprising to see market participants take a relatively dim view of proceedings.

We have, then, rather rapidly moved back towards the middle of the ‘dollar smile’, where participants are betting that US economic output ‘catches down’ to that seen in the RoW, at the same time as better havens, less exposed to the tumultuous political backdrop, present themselves. The DXY, as such, slipped below the 106 figure yesterday, to its lowest since last December, with the greenback losing ground against all major peers.

Admittedly, I’m a little staggered that the loonie trades basically where it was on Friday, despite 25% tariffs having been imposed, but we can only trade what’s in front of us. That said, if the CAD can shrug off tariffs from its closest trading partner, then the EUR should have no trouble doing the same, with the common currency moving further north of the 1.05 mark yesterday. Meanwhile, haven demand drove USD/JPY down to the 148 figure, with spot trading to its lowest level since last October. Don’t rule out the loonie leaking lower, though, particularly if tariffs remain in place for some time, as the longer tariffs persist, the more detrimental their impact will be.

More broadly, the big old growth scare narrative has seen the USD OIS curve shift to now fully discount 3x 25bp cuts by the end of the year. That feels a bit punchy, tending to suggest that participants are more worried about tariffs (& other Trump policies) choking off growth, as opposed to any potential upside inflation risks.

I’d argue that those two are a bit more balanced than current pricing would suggest, though we’ll need a convincing beat in both today’s ISM services survey, and Friday’s jobs report, to spark a turnaround in market pricing. Treasuries have also advanced, with 2-year yields falling below 3.90% intraday yesterday, touching their lowest level since early-October 2024, before paring some of the move.

Ongoing growth worries, and the tariff fallout, continue to roil Wall Street as well, with the S&P yesterday briefly trading below its level on election day. In the short-term, things do look rather ropey here, given the aforementioned combination of huge policy uncertainty, and dismal economic data, along with there being no ‘Fed put’ to ride to the rescue.

Tactically, the bears will likely maintain the upper hand for the time being, with any rallies – were they to occur – likely being faded in relatively short order, unless and until data turns, or some kind of end to the tit-for-tat tariff escalation comes into view.

Speaking of rather downbeat outlooks, crude finds itself in the worst of all worlds right now. OPEC+ will, surprisingly, be going ahead with their planned supply hikes from April onwards, right as the US economy stalls, China continues to struggle, and Trump/Bessent run around screaming ‘drill baby, drill’ at the top of their voices. All in all, that’s probably as convincing a bear case as it’s possible to build, and should see both Brent and WTI continue to slide, particularly now that the psychological floor at $70bbl has broken.

LOOK AHEAD – A busy docket up ahead.

This afternoon’s US ISM services PMI print is the obvious highlight, as participants desperately search for any data that may dispel the ‘growth scare’ narrative. The index is seen falling to 52.5 last month, from 52.8 in January, though any softness here, or ‘stagflationary’ sub-components as seen in the manufacturing survey, are likely to result in a renewed round of de-risking, sparking equity selling, and haven buying. The February ADP figures may also attract extra attention than usual for the same reason, not because they are a good predictor of Friday’s payrolls print, but because they are another print that may steady, or worsen, growth jitters.

Elsewhere, the ‘great and the good’ of the Bank of England head to Westminster, including Governor Bailey, for their quarterly testimony in front of the Treasury Select Committee. Policy guidance, if any is offered, should largely repeat the ‘gradual and careful’ approach outlined in the February statement.

Lastly, final reads on the S&P Global services PMIs will drop through the day for most major economies, while the most aptly named Fed ‘Beige Book’ – always a drab read – will be released during the London evening.