Breakfast Bites - Who blinks first?
Another round of tariffs; Delta withdraws guidance; Treasury yields spike
Rise and shine everyone.
This is one of those mornings when you wish you had just stayed in bed.
Tariffs went live today, with 104% on China. And we’re seeing a series of events unfold.
As I write this, China has now imposed another 84% tariffs. This has turned into an ugly contest and we’re all caught in the crossfire. Who blinks first?
Chinese markets were actually up this morning because they are stepping in to support the market. So China’s ready for this fight.
Delta just reported and withdrew guidance.
I expected lower guidance and revisions to estimates. I didn’t expect withholding guidance so soon. This isn’t going well. Sure, Delta is probably not the best example but events like these tend to set trends.
We also saw treasury yields spike. Now, there’s a lot of conjecture as to why this may be happening. I think it’s a whole host of reasons, not just one. I elaborate in the section below. But suffice it to say, this does not bode well for the markets. People are selling treasuries. When we decide to pull funds out of what is meant to be a safe haven asset, it starts to become worrying.
Yesterday, US equities took another tumble and this morning we’re seeing markets continue lower. But, as Mayhem points out this is not a normal market. What we’ve seen in the last two days is extreme volatility and whipsaw action.
Markets around the globe are also trying to understand the impact of tariffs. There were discussions of negotiations. And yet, tariffs were not paused on the countries that reached out for negotiations. So, countries that retaliate and don’t get the same treatment? This brings about a whole set of questions as to what will happen.
Negotiations may actually lead nowhere.
Markets are not taking this well, and Gold seems to be the only safe haven in all of this mayhem.
Treasury Yield Spikes
Treasury yields spiked last night and are spiking once again. Yes, the market is pricing in higher inflation. And no, this is not some 4D chess game.
One of the big theories is, of course, China selling US Treasuries. A very viable theory, in fact. If we look at Treasury stats, we see China is the second biggest holder / buyer of US Treasuries.
But I think the spike in volatility and the unprecedented events have actually brought together a confluence of factors as well.
Investors are now selling whatever is convenient to raise cash. Some are forced to because of margin calls, and margin requirements. Some just want to be safe.
There’s also the issue of structured products. We’re hearing a lot about basis trades.
The basis trade is a long-running investment that seeks to exploit pricing gaps between Treasury securities and futures. It has been pitched as a stable, reliable source of returns with low volatility. (WSJ)
In times of volatility these, and other structured products start to break down and can force the sale of treasuries.
Risk parity trades, for example, count in part on bonds and stocks moving in opposite directions and use leverage to try to increase returns on bond investments. So when stocks and bonds move in the same direction, they break down.
We’re in really tough waters right now, and being defensive should be our only play.
What we’re watching today
Honestly… everything. It’s a day to be on guard.
Calendars
(news taken from Reuters, FT, Bloomberg; Calendar from Trading Economics)
Earnings Calendar from Earningshub:
