What a week! Market volatility – with US equities surging as much as 9.5% last Wednesday – makes rather a mockery of trotting out the usual weekly performance numbers. But for what it’s worth, global equities ended the week up around 2.5% in both local currency and sterling terms.
Global equities in sterling terms are currently down 13% from their February high, 9% year-to-date and back to their levels last summer. The US led last week’s rebound, having underperformed before, gaining 4.5% while the UK, Europe and emerging markets posted returns of -0.7%, +0.8% and -4.7% respectively. European markets are up around 2% this morning.
The incessant flip-flopping in tariff policy was behind the wild gyrations with Wednesday’s jump triggered by the announcement that, while the 10% universal tariff would remain in place, reciprocal tariffs would now be delayed for a three-month negotiation period. But the relief was tempered by news that this reprieve did not extend to China and the US was increasing the tariff on Chinese imports by 125% to 145%, which China promptly matched one-for-one.
If this wasn’t enough, Saturday then saw the Administration announce that mobile phones and computers would not be subject to reciprocal tariffs. Only then for there to be the news on Sunday that any such relief would only be for a month or two until tariffs on specific sectors such as semiconductors were introduced.
Equities were not the only market to see wild gyrations. 10-year US Treasury yields jumped by 0.5% to 4.5%, leading to US Treasuries and UK gilts losing 2.5% and 2.3% respectively over the week.
This jump caused alarm in the US Administration and was probably – despite protestations to the contrary – the reason for Trump blinking and the delay in implementing the reciprocal tariffs. The Treasury market is critical to the stable functioning of the US financial system and these signs of stress were unnerving. Indeed, the Fed would undoubtedly intervene if such stresses worsened, as it did at the height of the Pandemic, even if as likely it holds off cutting rates for the time being.
The reason why it caused alarm was that Treasuries are generally viewed as a safe-haven and should benefit from market turmoil and recession fears. Instead, last week saw a sell-off. Part of the reason is that the fear is not just of a recession but also of a spike in inflation. Investor losses may also have triggered margin calls which required raising cash from assets such as Treasuries.
But a good part of the explanation is almost certainly down to the fact that the wild gyrations in US policy mean US Treasuries are no longer perceived as quite the safe-haven they once were. Indeed, the dollar fell 2.8% last week and this again was unusual. Like Treasuries, the dollar has in the past typically benefited in times of stress as US investors repatriate money from overseas.
Gold, meanwhile, continued to benefit from the market turmoil and the reduced appeal of other safe-haven assets. It hit a new high and was up as much as 6% over the week.
In more normal times, Thursday’s US inflation data would have been centre stage and driven a decline in bond yields but last week they were almost a side-note. Inflation came in lower than expected in March with the headline and core rates declining to 2.4% and 2.8% respectively. But this provided scant comfort with talk even from the Fed of tariffs driving inflation up to 3.5-4% later this year.
A shallow recession looks quite possible with the economy now suffering a double hit – the impact of the tariffs themselves and just as important all the uncertainty caused by the policy flip-flopping. This is already taking its toll on consumer confidence which retreated further in April back close to its 2022 low.
Here in the UK, the latest GDP numbers provided a welcome bit of good news. Activity rose an unexpectedly large 0.5% in February, easing worries over the drag on the economy imposed by the tax rises in the Budget.
So, where does this all leave us? The good news is that last week’s events have shown that market turmoil can force Trump to blink. And the hope is that China and the US will at some point manage to find a face-saving way to step back from the all-out trade war now underway. The bad news is that, even if the immediate threat has lessened, tariffs look set to remain a major source of uncertainty for at least another three months.
We stick with our advice of last week – hold your nerve and be prepared for more market turbulence over coming months. As to how much further equities could fall and how quickly they could bounce back, it all depends on what happens with tariffs and whether there is a recession or not. And on both fronts, it is very much up in the air.
Last week’s wild gyrations do highlight a couple of points. First, quite how sharp a market rebound can be and how fleeting it can prove, both reinforcing the danger of being whipsawed if one tries to take advantage of market moves in the current environment.
Second, the importance of a well-diversified portfolio. The sell-off in Treasuries highlights the danger of just relying on one source of protection. Rather, one needs multiple sources which may all play their part at different times. This time, gold has been the star performer but not the only source of protection – consumer staples companies for example have actually risen a bit during the market sell-off.
This coming week, tariffs and Treasuries will remain centre-stage. However, the US earnings season also kicked off on Friday and in more normal times would provide a source of support with earnings expected to be up 8% on a year earlier. First quarter Chinese GDP on Wednesday will also be a focus, as will the ECB meeting on Thursday which should see rates reduced another 0.25% to 2.25%. Finally in the UK, there are labour market and inflation numbers out on Tuesday and Wednesday.
Rupert Thompson – Chief Economist