Spreading beyond tariffs

Although sentiment across the European assets was strong yesterday – on the tariff relief, remember? – things started looking less optimistic toward the end of the session and the futures are in the negative this morning on the back of a few not-so-optimistic news on the trade front.

First, the US and the EU made little progress in trade negotiations; for now, the 20% tariffs remain for both sides. Then, China is not only NOT calling Trump to talk about tariffs but they also announced that they will not buy Boeing planes - we are talking about 29 planes that China decides not to buy in 2025. And, finally, Trump administration decided to restrict the export of Nvidia’s H20 chips to China. Note that these chips are specifically designed for China – they are good for inference but not as powerful as the premium chips for AI training. Concretely, Nvidia warned that it will report $5.5 in writedowns during this quarter and Bloomberg Intelligence estimates that the total revenue miss for the company could be between $14 and 18bn for the year. Consequently, Nvidia lost more than 6% in the afterhours trading, and Nasdaq futures are looking worse than the others. ASML is set to report weaker orders in the Q1 due to tariff uncertainty and TSM is expected to announce around 56% profit growth in Q1 thanks to a 42% increase in sales but forecasts will probably matter more than the actual numbers this earnings season because of tariff uncertainties.

Tariff uncertainties on earnings

There are three major challenges with the tariff situation.

1. We don’t know the size of the tariffs, we don’t know how long they stay, will they be increased, decreased, rolled back.

2. The potential strength of the Q1 earnings is partly due to frontloading in demand before the tariffs hit, and could be followed by a quarter – or two – of below-trend growth as companies delay their capex and AI investment plans due to uncertainties.

3. The trade escalation between the US and China continues at full speed, and is spreading into other measures. In this context, the US just requested Nvidia to stop selling its chips designed for China to the Chinese, and in response the China could well restrict its exports of rare earth metals and other commodities essential to building chips and machines to the US.

In summary, risks prevail. Note that the latest GDP data released in China this morning topped analyst estimates showing that the country grew 5.4% yoy in Q1, retail sales jumped nearly 6% compared to 4.2% expected by analysts and the new home prices dropped the least in 9 months. The stronger the Chinese data, the less likely it is to bend to US demands. iShares MSCI China ETF was down yesterday after a more than 10% rebound since April 8th. The companies included in this ETF have less than 3% revenue exposure to the US, meaning that the impact of the trade war and cancelled US orders will remain limited, while these companies will benefit from the Chinese stimulus measures and the weaker yuan.

Death cross formation for S&P500 and Nasdaq

The S&P500’s daily chart is now flashing red with a death cross formation – where the 50-DMA crossed below the 200-DMA. While some traders see the death cross formation as a lagging indicator, the last time we saw a golden cross formation – the opposite of death cross formation – in the beginning of 2023, the S&P500 rallied up to 48% in months that followed the golden cross formation. Of course, technicals don’t guarantee a future price action, but the 50-DMA is below the 200-DMA for the S&P500, for the Nasdaq 100, and soon for the Dow Jones.

Gold and FX

Unsurprisingly, the escalating trade tensions continue to boost appetite in gold. The price of an ounce just hit a fresh record this morning at $3283 per ounce. The US dollar remains under the pressure of the trade war that starts having concrete consequences for the US companies and fuels the recession fears in the US. Good news – if you are looking for good news – is that the selloff across the US treasuries is more contained now than it was a week ago, and that’s important to judge how severe the risks of a financial crisis is. For now, bond holders are holding tight.

In the FX, the decline in US dollar appetite continues to push the major currencies higher. The EURUSD was bid below the 1.13 yesterday, as Cable extended gains to 1.3266 despite a decent fall in UK payroll numbers in March due to the scheduled rise of employment costs this month. Wages were slightly below expectations but the fact that spending increased in March despite the rise in bills was seen as encouraging news. Inflation and growth uncertainties prevail due to the tariff uncertainties. But if inflation remains under control, the Benk of England (BoE) could support the economy through turbulence. If inflation rises however, the BoE support will be limited and the latter could weigh on UK growth expectations and sterling. Cable, of course, looks strong due to a sharper downside revision of US growth expectations, but the recent rally of the EURGBP warns that appetite in sterling is not as strong against the euro.