Liberation Day – Trump shocks global trade
Last Wednesday Trump imposed global tariffs at his proclaimed “Liberation Day”. The US imposed 10% blanket universal tariffs as a baseline, and then additional tariffs based on an odd formula dividing each country’s trade deficit by their imports. Overall, tariffs on Europe at 20% were roughly in line with expectations, while Asia was broadly hit worse than feared with China now facing 54% total tariffs. Mexico and Canada were spared from the announcement, following previous tariff dramas. China followed on Friday with 34% counter-tariffs on all US imports, restrictions on rare earth exports and investigations into US companies. The Treasury Secretary was quick to calm the markets, stating these tariffs can be negotiated down but overall the damage to global trust in the US has been done.
Liquidation Day – Markets panic on trade disaster
Markets reacted with shock to Trump’s announcement itself, but also the randomness with which the Trump administration determined the tariffs. Markets fear a US and global recession, but now also lack trust in US markets. Some estimates for US recession odds rose above 50% for the year ahead. Risk assets repriced materially, as the S&P 500 index fell 9%, while US high-yield (HY) credit spreads rose 60 basis points on the week. The US-Dollar fell up to 2.7% post Liberation Day, but later recovered slightly as markets morphed into full risk-off mode and the Dollar retained a slight haven status. Gold, a long-time popular haven, finally fell 2% on Friday amid a broad liquidation of positions. The Fed is now priced to cut more than four times this year, with the upcoming May meeting priced around 50%.
Reciprocal Recessions – Mind your risk
We expect the uncertainty shock to weigh on global economies in the months ahead, as we wrote in The Myth of Exceptionalism. Friday’s NFP print of 228k was resilient but backward looking. Survey measures like ISM again looked weaker last week and point to continued worsening sentiment. We see a medium-term shift from US to European assets, as the US loses trust but Europe has the fiscal firepower to stimulate the economy. As investors shed risk more broadly, we remain cautious in credit markets, which have still been fairly resilient.
Algebris Investments’ Global Credit Team
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