Prisoner's dilemma

Yesterday saw the worst selloff since the pandemic. Equity markets gave a strong reaction to Trump’s tariff nonsense: the S&P500 lost almost 5% erasing around $2 trillion in market capital, Nasdaq 100 tanked 6% and the Dow Jones dumped 4%. Apple, Amazon, Nvidia, Microsoft, Tesla lost tens and for some hundreds of billions in market cap. Companies that have complex worldwide supply chains like Gap, H&M and Dell saw heavy losses, as well. Gap and Dell lost around 20% of their total market cap in a single session. These are not meme stocks, these are established companies. In Europe, the Stoxx 600 lost more than 2.5%, the Hang Seng index is down by around 1.50% this morning, Nikkei lost more than 17% since January, the treasury yields tanked across continents as investors moved money to safety, gold hit a fresh record, while the US dollar index lost around 1.70%.

The tariff chaos will likely help the euro end the week above the 1.10 mark and sterling above 1.30 against the US dollar. And gains could be sustainable as nations look willing to retaliate. The EU said there will be a strong response that could include measures against American tech giants and limitation on US investments and Canada imposed 25% levies on US-made vehicles. Bloomberg even suggests that the US treasuries are at risk of foreign buyer strike in tariff retaliation!

The global economy has now entered a dark tunnel. No one knows what’s next. For the Europeans, there is some kind of a consensus that the European Central Bank (ECB) would shift toward a more supportive stance than otherwise as long as inflation remains in check. The Swiss National Bank (SNB) is now expected to pull the rates down to 0% and even to the negative territory to – at least – counter the franc’s strength and help exporters with macroprudential measures. For the Federal Reserve (Fed) however, opinions diverge. Some think that the Fed will cut rates aggressively to slow economic slowdown, while others think that the Fed won’t cut at all this year due to rising inflation expectations. Activity on Fed funds futures give reason to the former - the probability of a June cut shot up to around 95% - but the Fed will be less restrictive in its response compared to GFC or pandemic due to inflation.

Pandemic-like supply chain disruption?

The risk of a heavy hit to global supply chains will require very strong reorganization that could take months and even years. As such, it’s not crazy to make parallels with the supply disruption of the pandemic to foresee what could happen next. And if we do that, the answer is clear: the inflation jump that we are about to see could not be ‘transitory’. The Fed could make the bet to cut rates despite heating inflation and to stabilize financial markets. But taming the strong downside revisions to earnings projections when the global supply chains are put under such pressure will be harder. The selloff could accelerate before rebound.

US jobs data doesn’t matter much

The US will reveal its latest jobs data today. On Wednesday, the ADP printed a better-than-expected figure. A consensus of analysts' estimates on Bloomberg suggests that the US economy may have added around 137K new nonfarm jobs last month. Either way, the US economy will soon start feeling the pain of tariffs – as manufacturing jobs won’t come to the US overnight – and the latter makes this week’s report totally uninteresting.

Crude Oil tanks on very bad combo

US crude dived 6% dive yesterday on the tumbling global growth and demand expectations combined with the OPEC+ decision to restore production more than expected. OPEC+ countries yesterday announced that they would bring 411K barrels a day to the market – the equivalent of three-monthly tranches from its previous output restoration plan. As such, the supply / demand fundamentals remain comfortably negative. Obviously, the tariffs will hit the global oil demand much less compared to the pandemic. Yet the upcoming slowdown in global economic activity reinforces the probability of a further slide toward the $50pb level.