I went to see the Minecraft movie over the weekend. In this, a frustrated man fulfils his lifelong passion and finds a portal to a world where he can make, shape and craft absolutely anything he wants. He also inadvertently opens up a portal to another world of danger and threats to the existing world that he has entered.
So, to tariffs (the portal to shaping the world in your own image) and a reprieve that has slightly walked back over the weekend, has lifted European stocks this morning and sent US futures higher to extend the run of gains from last week’s ridiculously volatile session. The FTSE charged up 2 per cent, with 2 per cent gains seen in Frankfurt and Paris. We have seen massive deleveraging, and this is still happening in real time, and no one knows what the trade headlines will be next.
Over the weekend, we saw reports that the White House would exempt certain consumer electronics and phones, etc from the worst of the China tariffs. Then on his Truth Social network, US President Donald Trump seemed to row back a touch by saying that no one was getting “off the hook”. Apple has rallied 6 per cent or so pre-market on the smartphone-chip reprieve. The idea that Trump caved and then sought to row back with that Truth Social post doesn’t really work. Trade notices invariably include exemptions after the initial announcement based on a wide range of factors. Still, the 90-day delay on tariffs for China is being viewed as a boost to risk.
Banks kicked off earnings season on Wall Street – a mixed bag with strong equity trading outcomes in the first quarter but a less assured outlook on the state of the US economy, rates and consumer lending. The earnings to watch for this week include Goldman Sachs and Bank of America – what is the outlook for mortgages and the consumer? On the strength of the US consumer, we also have the US retail sales data for March: expect lots of pull forward in demand ahead of the expected tariffs. The very weak consumer sentiment survey and super-high inflation expectations (highest since 1981) are the tell for the future.
Earnings season will feature a lot of kitchen-sinking on tariffs from some companies, so beware of the noise.
The European Central Bank is likely to cut rates this week: some conflicting messages but if it was 50/50 for a cut this week after the last meeting, then the odds are surely a lot shorter now after the tariff moves. The other reason to cut would be inflation – tariffs could well be net disinflationary in Europe as China will need to find alternative markets for its goods and the EU is a prime candidate…cue Europe erecting anti-dumping rules and the cycle continues.
The point to remember in all this is that this is just the beginning. There are multiple elements to the tariff agenda – the political mandate from the American people to the long-standing grievances on the US side that make this more than just saying ‘Trump’s crazy, what’s he doing?’.
There are the economic impacts – the narrow one from tariffs forcing up prices, but then the second-order impacts like disinflation for RoW. Long term, as well, the economic unsustainability of the fiscal position of the US and other Western nations makes this an incredibly important moment.
Then we have the market moves: surface froth at the moment, albeit very frothy until that is we see systemic risk to financial markets from the scale and pace of the moves. In this case, we move into a new phase of this trade war > currency war> economic war. It may be hard to hear amid the noise, but Trump is saying that you’re either inside the tent or out.
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By Neil Wilson, Investor Strategist at Saxo UK
