Breakfast Bites - Global Markets gap down
Circuit breakers were tripped; uncertainty remains; still no changes to tariffs
Rise and shine everyone
It’s an ugly Monday morning in the markets. Global equities are taking a hit after the first round of 10% US tariffs went live over the weekend. We’ve heard about quite a few circuit breakers tripping and extraordinary measures being taken to stabilize markets. President Trump says that sometimes we need to take the medicine, which is not really comforting for the recovery of markets.
The Nikkei 225 has officially entered a bear market after a sharp 7.8% drop at the close. Germany’s DAX opened down 10%, deepening the global selloff.
Crude Oil is also lower. WTI dipped below $60/bbl. President Trump said this is good for the economy and that there is no inflation. The problem is that this level is not great for the oil companies, and many are reluctant to drill when oil dips this low. We would likely need to see some deregulation and government intervention for the US oil companies.
The Vix (Volatility Index) also hit 60 at one point. We’re now seeing it move off the highs. With this spike, we’ve now surpassed the 2018 levels, but still remain below 2020 and 2024 Aug. Perhaps this is a reason that people continue to think we will see a quick recovery.
In Aug 2024, after a few days of drop, the markets recovered fairly quickly and went on to make new all-time highs. While this market will also move on to make high, I don’t think that reversal will be as quick. The markets were triggered by two significant events at the time that hit risk triggers and caused a lot of closing out of positions, and margin calls. Now, however, we’re seeing active selling, including shorting. My view is that the August moves were more defensive, while the current selloff is driven by the anticipation of a deteriorating global economic environment.
With markets moving lower this drastically, there’s still a sizable amount for systematic funds to sell. I wrote about this yesterday, and one of our readers, Ed, also pointed out that he has seen structures in the insurance industry that could exacerbate selling as the market sees extreme volatility and selling shocks. There are multitudes of such structured products that don’t do well in a high-volatility environment.
US Equity Futures also gappen down on the open and are gradually moving off the lows. But I don’t see this as the all-clear. Waiting for confirmation to buy is likely the right approach.
Responses to tariffs have come in many shapes and sizes. Some are open to negotiation, while countries like Malaysia are talking about boosting domestic consumption and forming alliances with neighboring countries. This is a real risk for the US, because it may mean countries gradually move away from selling to the US. At this point, America still doesn’t have industries to support domestic consumption, and even with tariffs, it could be more economically viable for companies to import.
A few major apparel buyers are halting imports - Walmart, Levi Strauss, Gap - from Bangladesh, where the tariff is now 37%. They’re waiting for terms to change in tariffs and / or pushing back on suppliers. Goldman’s chart below suggests companies have already frontloaded imports quite a bit and this is likely to slow into the second quarter.
Analysts are also making adjustments to projections. GS has cut global GDP growth to 2.3% below the market consensus of 2.6%. They’ve also reduced US GDP growth to 0.5% for 2025 and increased the probability of recession to 45%.
My personal view has been that GS is one of the more optimistic ones, having always come out higher on growth over the last two years. So, I see this as quite a bad sign.
Economic Policy uncertainty has hit an all-time high… or at least since 1985! And there is still no change to tariffs or actual signs of negotiations. Only whispers.
I am still cautious, and while my fingers are hovering over the buy button, I’m glad that I didn’t on Thursday. I am, however, making a list of what could work in this environment and will certainly be sharing that during the course of the week.
Safe havens are proving elusive, with both gold and the US dollar under pressure. The Swiss Franc appears to be one of the few assets offering any refuge.
Please be safe out there.
Calendars
(news taken from Reuters, FT, Bloomberg; Calendar from Trading Economics)
