Destination unknown

It is often said that it is not the journey rather the destination. Fingers crossed here for the process being less important than what will hopefully be the successful renegotiation of imbalances around global trade. We find ourselves in a situation where uncertainty is near all-time highs as the complexity, interconnectedness, and unintended consequences are likely to unravel and be more dramatic the longer this all takes. The honest answer is we can only opine as to where some of the risks may lie and areas to look out for. Firm views from anyone are likely to only be relevant for hours or days at this juncture, at best.

Macro

Shocks to stocks. Currencies in disarray. Allies tested. Throw in significant debt piles, slowing growth, and businesses and consumers dazed, confused and sitting on their hands and we’ve got quite the cocktail. According to the International Monetary Fund (IMF) who published reforecasted growth predictions for this and next year on Tuesday, downward revisions for 2024 and 2025 by 0.5% and 0.3% respectively for outright global output growth of 2.80% and 3.00% are their best guesses. At least we are still in the green! For now... The biggest strain continues to be that between the US and China, so let's take a closer look. Almost 40% of Chinese imports are used in US production, as opposed to just being made up of finished goods such as “sneakers” and Tupperware. Thus, when assessing both the true cost and likely contribution to inflation, it feels almost impossible to avoid another bout of inflation. Since Trump's first presidency, Chinese imports have fallen from 20% to 14%. Important to know when thinking about who holds which cards. Some records (of the non-musical variety) continue to be broken, with gold returning as a/the seemingly safe haven. Might this be from reduced US debt holdings overseas? We’ll need to wait for the data but recent history suggests nations are looking at rebalancing reserve holdings and questioning the safe haven status of US bills and bonds. Goldman Sachs sees the shiny stuff hitting $4,000 an ounce (almost doubling from last April, and 15% up from there here and now) whilst Nomura are rebranding it the only true safe haven asset left. Bold statements. At least it remains denominated in USD and thus some order prevails. It is hard to see how or where a credible contender for the global currency might reside away from Uncle Sam. The “Trump Trade” narrative continues and at pace, some now calling it the “Sell America” trade. Tough. Volatility already seeing casualties which are likely to pile up far and wide should certainty not return. Evidence is already being seen with an example just this week where a UK foreign exchange broker, Argentex, was unable to make payments, halting trading and calling on liquidity lines to help out. Either way, the clock on that 90-day extension is ticking down, fast.

Risk

So where is risk and what has happened to stocks? Well, the VIX, a crude bellwether for sentiment on Wall Street and beyond, has been on quite the ride, trading through 80 in recent sessions and at one point peaking above where pandemic-related panic flashed “extreme danger”. As I write at least, we remain in “fear” territory (above 30) at 32.12. In terms of indices, the gains we had talked about since January have been nuked in the US. All the domestic majors here are down, with the Dow Jones (-16%), S&P 500 (-18%), and NASDAQ (-23%) taking a real beating. The picture in Europe/UK is less bleak, gains holding for 2025 thus far, being up between 0.82% (Netherlands) to just shy of 16% (Spain). Most of Asia remains ugly, a 10% drop for both the Nikkei and CSI 300, covering the two major exchanges representing Japan and China. The Hang Seng though managing to sneak in a win mirroring the Netherlands at the time of writing, although historically suffering from considerably higher volatility. Hold on to your hats!

Credit

We have been commenting for some time that money seemed too cheap as many indicators have been pointing to us being not just at the top of the rate cycle and turning of course, but also for the additional spread needing to be given up for folks to switch out of risk-free rate proxies and lend to financial and corporate institutions. We have seen days where deals were cancelled amid those wild swings from just a few sessions ago. Thankfully investors have returned, the market reopened, but with new prices (or higher yields needed) in mind as the outlook has darkened. Whilst reporting for Q1 was in reasonable shape, from here on in one thing is certain which is everybody is considerably more cautious and greed has been replaced by fear in the world of animal spirits which typically prevail in capital markets. Where the pain has been felt most is in the sub-investment grade or “junk” bond markets. Not only are folks demanding considerably higher returns for the risk, but default rates were already on the march upwards. Certainly one to watch. Know where your risks are please and track them!

EUR

As expected, the ECB cut by 0.25% last Thursday. I say as expected...but those words feel disingenuous right now. Some market participants had speculated that the ECB might do more and sooner to avoid what will undoubtedly lead to a more abrupt slowdown. My view? The ECB was right to stand fast and spare ammunition for rainier days that might be coming. From an inflationary standpoint at least, a number of voting members have been vocal in their belief that the 2% target will be met in the coming months. Sadly this is likely due to demand falling over and potential unemployment to hit, as opposed to any soft landing that one would wish for at this particular juncture. The market currently sees a further three 0.25% cuts to the end of the year leaving us at a rather meagre 1.50%.

GBP

Much has been said of the economic plan in the UK since Labour came to power. None of it has been particularly positive. Headroom has dissipated and it remains unclear how it might be filled as the government has to date confirmed no additional creeps in capital gains tax and that pensions remain safe. The BoE is projected to cut rates an additional 4 (!) times by 0.25% apiece to year end, putting us at 3.50%. Interestingly, one member of the voting committee known to like higher-for- longer, Megan Greene, commenting Tuesday, believes tariffs to be disinflationary for the UK. Why? A weaker dollar and more cheap goods diverted to those white cliffs. Continued volatility is the overarching theme from her words, along with the importance of an independent central bank. A clear retort to verbal attacks made by Trump targeted at Governor Powell. More on that shortly...

USD

Trade negotiations take time. Certainly not days or weeks. Normally, a full 18 months or so for the US to negotiate a single trade deal. Now multiply that by the number of countries involved, and DOGE cutting government jobs, and one starts to ask very uncomfortable questions. All the while, central banks far and wide are questioning the credibility and viability of the safe haven status of the US. Whilst times change, the degree to which policy can affect outcome has rarely been so blatant and, unfortunately in this instance, damaging for all. It was clear that terms of trade needed addressing, but oversimplification and amplification have proven to have rather disastrous short- and potentially medium- and long-term. All this whilst shocking the domestic economy with both companies and consumers in retreat. Employment is key to watch here, along with our old friend and foe, inflation. Tens of trillions in debt is due to be refinanced in just two short years, thus it is understandable that lower longer term rates are favourable. Whilst cuts are considerably more likely to be needed now, if investors globally now demand larger premiums to buy said debt, outright levels may remain elevated with the net result being domestic and international scarring of economies that may not have been necessary. We all understand no pain no gain. Let’s hope this is not a case of all pain no gain. Attacks on the Federal Reserve and the independent setting of interest rate policy has been a major development in both advanced and emerging economies. The decoupling from politics has been proven beneficial. 

So what?

More has changed in just a month than could have been predicted. As we continue to highlight though, continued uncertainty remains the core theme. Sadly for now it feels peace is on the backburner in various geographies as the reshaping of the global economy takes centre stage. Much will be written on what is unravelling before our very eyes. For now though, intermittent data and flip-flop announcements do not serve us. As is always the case, prudence and holding sufficient liquidity buffers remain critically important, along with having safe havens and diversification at one's fingertips.

*TreasurySpring’s blogs and commentaries are provided for general information purposes only, and do not constitute legal, investment or other advice.