Markets in turmoil as Trump escalates tariff threats and recession fears mount

WHERE WE STAND – How on earth is it only Tuesday morning!?

From Ugly To Just Downright Messy

After yesterday’s market action, it feels like we’ve already had about a month’s worth of news flow in the space of just one trading day.

I said yesterday that things were ugly. I will say this morning that, frankly, they are now just a complete and utter mess.

For the most part, sentiment remained pretty depressed as the new trading week got underway, with stocks slumping across the globe, and trading terminals on desks all over the place becoming a ‘sea of red’. This came as market participants continue to react aggressively to President Trump’s ‘reciprocal’ tariff announcement last Wednesday, dumping equity exposure as much and as rapidly as possible. That said, stocks on Wall St did manage to close basically flat on the day, the S&P notching marginal losses, though trade was very choppy indeed, and the gains hardly convincing.

Perhaps the biggest moment of messiness and madness yesterday came after what proved to be fake reporting, attributed to WH Adviser Kevin Hassett, that Trump may be mulling a 90-day tariff delay. While this was denied in relatively rapid fashion, the rumour mill had already gone into overdrive, sending the S&P as much as 4% higher on the day, and giving us a clue as to what the market reaction could be if Trump did make a policy pivot, and how desperate folk are for a bit of good news.

Such a pivot, though, still seems distant. Not only have senior Admin officials doubled-down on the protectionist rhetoric, and shown little concern for recent market volatility, or the mounting risk of recession.

In addition, President Trump has continued to up the ante on tariffs themselves, yesterday threatening an additional 50% tariff on China from 9^th April, if China doesn’t back off the 34% retaliatory tariff on the US announced on Friday. By my maths, this additional tariff would bring the tariff on the majority of Chinese imports to a whopping 104% - with some even higher, owing to the ‘Section 301’ tariffs that remain in place. If that goes ahead, you may as well kiss goodbye to any last, lingering hopes that the US economy might avoid a deep recession.

All of that is one hell of a mess, underscoring the incoherence with which policy is being made, and making it utterly impossible to hold risk right now.

In short, the message from the White House appears to be this – the beatings will continue until morale improves!

Those beatings are, clearly, having a hugely negative impact on financial markets, where there appears to be no hiding place whatsoever. Stocks slumped once more yesterday, albeit ending well off intraday lows, while Treasuries sold off aggressively across the curve, and gold also slumped. This all smacks of participants selling down their portfolios in order to fund margin calls elsewhere, most definitely a theme to watch going forwards. Interestingly, that rise in yields did provide a helping hand to the dollar, which advanced against most G10 peers, though I still favour selling rallies here.

That move in Treasuries worries me, though, with benchmark 10- and 30-year yields having risen as near as makes no difference 20bp each on the day. If it’s not a case of selling winners to pay up margin elsewhere, then maybe it’s a market bracing for a deep recession that would start with a 7% deficit that will then only get worse. I’m honestly not sure which of those scenarios is worse.

Importantly, what we’ve seen so far from markets has been the primary impacts of Trump’s announcement last week – a dramatic, and rapid, de-risking/de-grossing exercise in reaction to the tariffs being both substantially larger than expected, as well as the basis on which those levies had been calculated being completely incoherent.

What we’ve not yet fully considered, or discounted, are the second round effects from ‘Liberation Day’ – recent market moves having the potential to spark mass margin calls and liquidation, financial conditions tightening  dramatically as credit spreads widen, funding pressures potentially emerging as X-ccy basis swaps decline. Besides those market structure impacts, there are also macroeconomic impacts to consider – the magnitude to which growth will slow, the appropriate recession probability to price, the degree of upside inflation risk that must be discounted, the negative hit to earnings that’s likely to pan out. This will, naturally, all take some time to mull over, especially in an environment as uncertain as this.

I’ve been asked a lot whether these market conditions are reminiscent of previous bouts of dramatic equity downside, namely the pandemic, and the GFC. In terms of the speed at which we’ve sold-off, it’s on a par. In terms of market conditions, its nowhere near, as things – for now – remain orderly, and liquidity is ok. In terms of policy, it’s also very different – with both of those examples, policy support was quickly forthcoming, that doesn’t seem the case this time around.

On the whole, this remains a market that is craving someone to come and ride to the rescue. That person doesn’t seem likely to be Trump, given the rhetoric mentioned above, nor does it seem likely to be Fed Chair Powell, with the FOMC focused squarely on ensuring inflation expectations remain well-anchored, amid the substantial tariff-induced price pressures that will soon batter the US economy. Clearly, the strike price for the ‘Fed put’ is quite a lot lower than where markets currently trade, with things likely needing to get quite a lot uglier before that option is exercised.

Consequently, if, as seems likely, there is no Oval Office U-turn forthcoming in very short order indeed, it appears that Trump will now spend the next 1,382 days of his presidency, undoing the self-inflicted damage that he’s caused in the first 78. I remain, sadly, of the view that things will probably get uglier, before they get better, for markets, and for the economy.

LOOK AHEAD – Today’s economic docket is barren, not that it matters much, as we all spend another day chained to our desks, fixated on the latest headlines, and President Trump’s social media account.

That said, it is, technically, the setup for a ‘Turnaround Tuesday’ today, with the S&P having lost ground on Thursday, Friday, and yesterday. Typically, that has a relatively decent hit rate for a rebound on the Tuesday, as calmer heads tend to prevail, and dip buyers emerge. I wouldn’t exactly be betting the house on a durable bounce, though, unless and until we get a decisive policy pivot. However, it’s worth remembering that bear market rallies can be rapid, and significant in nature, though simply present opportunities to sell into strength.