Market melts down as recession risks go global
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All right. Hello, everybody. It is Friday, 4th of April 2025, and we have markets on tilt. One of the worst days for the U.S. equity market and not so great elsewhere as well. But one of the worst days for the U.S. equity market was the worst day since the pandemic freak out days of the spring of 2020.

Some huge moves, the NASDAQ down over 1,000 points. I forgot the point total on the S&P. You can see there on our slide deck, and you can find the link to the slides in the podcast description there on slide two, just a really ugly candlestick as the market was caught rallying into the close just before Trump delivered the massive blow with the Liberation Day tariffs, and we gapped absolutely massively lower.

And closed, however, not more than a couple percent below the prior intraday low, but still just a very ugly session from one day to the next.

We have the market moving with these tariffs with the sense that this is going to bring rising risks of a U.S. recession. We've got the market marking the Fed to cut a full 100 basis points through the December meeting. There could be more to come there. We'll talk about that a little bit. And global yields getting crushed as well as this U.S. recession risk is seeing some contagion, some notable moves like the U.K.,

two-year gilt falling 16 basis points. And even Japan, I mean, you don't have a lot of yield to work with in a Japanese two-year JGB, fell 15 basis points, essentially taking most of that anticipation of rate tightening out of the forward curve in Japan. And then we see some real drama in U.S. equity markets in terms of specific names, some big surprises in that mix of tariffs. Again, on a company like

Like Nike, who to me, just a real lack of vision in terms of resourcing or reallocating their production around the world. They've got 50% of their shoes produced in Vietnam and that 46% tariff on Vietnam, very ugly for Nike. They were down 14%. Dell was the worst performer on the S&P 500, down 19%. A lot of focus on hardware production.

for these computer companies. And then Apple, Amazon, and Meta all down around 9% on the move yesterday for varying reasons. Amazon peddling a lot of Chinese-made stuff. Apple, obviously, with the supply chains not only in China, but also a lot of their move has been to India rather than elsewhere. And there's also tariffs on India of 26%.

And then a specific name like Restoration Hardware, a high-end furniture company sourcing most of their production out of China, apparently, down 40%. Some really ugly moves. And the risk-off was not just in the U.S. It was elsewhere as well. And we're seeing some really notable...

tightening in some of the classic risk indicators like junk bonds, 52 basis points spread widening in the Bloomberg measure that I track of junk bonds versus U.S. Treasury. That is out to 387 basis points now, historically on a massively high level. But we came from very, very low, almost record low levels or spreads in junk debt.

And that 387 basis points leaping us or taking us beyond the spike back in August of last year with that yen carry trade unwind and other – some people say it actually wasn't just that. It was also about the unwind of the so-called –

What's it called? Dispersion trade, correlation trade, what have you. But there you have it. Where do we go next? What are the next targets? Well, tough to say, but one key level I'll be watching is the 20% correction amount, which is, as we mentioned yesterday, just below 18,000 on the NASDAQ 100. Still a long way to go in the S&P. I mean, we're down to 53.96 when the cash closed yesterday. A bear market of 20% is not until 49.18 or so, if I did my calculations correctly. That'd be another 480 points.

And then Fibonacci technically on the NASDAQ 100 at least, this 17,722 level could be a focal point for the market here.

And then I ask, and we've got Ola down the line, by the way, but I'll be getting to you, Ola, in a moment because we saw some very interesting moves in the commodity space, particularly silver and crude oil. We'll get to that for sure in a moment. Just want to point out on slide three that the action in European markets is starting to look pretty ugly as well. We had quite a time there where Europe was holding out. So we have the

anticipation of massive German fiscal, et cetera. But we have to remember things like the euro strengthening viciously is a negative for European stocks. And of course, tariffs being slapped on Europe as well as a growth negative in the short term, even if the fiscal cavalry supposedly is going to ride to the rescue further down the line. And a move like we see currently in the stocks Europe 600, for example,

which I show there on slide three, you can see that it's smashing down below the 200-day moving average. And essentially, we've backed out completely the whole new episode of highs there relative to the highs and resistance established in 2024 when it broke above the 525, 530 level. So not looking great in Europe either. And yeah, and then we have earnings season starting next week. That would be very interesting to work our way through.

As we look to see how companies are either, you know, having a hard time providing any forward outlook or definitely marking it down or what they're doing in terms of the impact of these, especially those dealing in the physical world with trade, etc. The banks are the first to report and as I show on slide four, I show this J.P. Morgan report.

equity chart there. It looks somewhat like a 200-day moving average break there, of course, but as well, a bit of a head and shoulders style formation. Financial is often a leading sector in past markets, but this time it's lagging a bit. What's going on elsewhere? And then briefly, before I get to you, Ola, on commodities, I'm going to talk us through a little bit on FX because I had a thought today. So

It's about getting our ducks in a row in terms of the timing of these FX moves. So while we have the prospect of European fiscal very positive for the euro currency, we have U.S. tariffs seeing as being very negative for the dollar from the perspective of a U.S. recession and from the perspective that global portfolio managers are going to reduce their U.S. allocations. I wrote an FX update this morning and it

questioning whether this move in the dollar was fair versus typically pro-cyclical currencies at minimum, possibly even something like sterling and even the euro. Is this move fair if we really get to continue to see a broad-based deleveraging?

When you have a broad base to leveraging and the panic gets a bit ugly, you see people, of course, reducing positions, and those positions are increasingly consensus dollar short, but also just seeking liquidity in general. And when you're talking about liquidity in general, what is the most liquid thing on earth? It is a U.S. Treasury. A two-year note, for example, is the U.S. dollar. So wondering outside of dollar-yen, but maybe even dollar-yen to a degree, but whether this dollar could actually –

during sort of the white hot part of a ongoing sell-off here, if that's what we get, could actually show a considerable two-way volatility. We saw it in Aussie dollar overnight, and we're seeing that following through. But this morning when I put out the FX update, sterling versus the dollar was something like 130.70 or so, and it was trading close to 130 the figure. Eurodollar backed below 110 just before I came in to record this podcast here.

So some risks there around that, and Ola, I suspect as well, some risks in terms of the gold positioning. With these consensus positions, you just start deleveraging your portfolio, and it doesn't matter about the long-term fundamentals. It just matters about reducing risk here. And is that what you're seeing? Oh, we saw that a bit to a degree yesterday. So you have that push and pull situation.

versus the very fundamentally positive story of the tariffs being a long-term gold positive. So I think I'll throw it over to you. I've got some other slides before yours, but I'll throw it over to you on the gold question and why silver also – not also, but why silver dumped so badly yesterday. Yeah. Well, yeah, John, incredible –

Nerve-wracking day yesterday, you can say. But we also, first of all, just have to remember where we came from. We came from a commodity sector that had rallied almost 10% year-to-date during the first quarter, far outperforming many of the other asset classes. So we are now seeing the market retracing some of those gains. It was particularly vicious yesterday in some of the growth-dependent

sectors, we saw both energy and metals being hard hit. But on the week, we were only down around 2% on the commodity index. So it's relatively, based on that, it's a relatively small retracement. But looking at the individuals, as you mentioned, the goal obviously is the first one we will look at. And it is what we often said in the past, when we

When we see these kind of volatility events where volatility spikes, then leveraged funds, no matter what position they love or don't, have to reduce exposure just to target the kind of level of volatility that they are targeting in their portfolios.

That also impact gold. So the initial reaction gold yesterday was quite a bit of a sell off. We came down to around 3050 before seeing a very strong rebound. We are on a defensive again today, so we're probably not out of the woods just yet.

But when we look at the underlying drivers with the dollar strength, with the real yields basically falling off a cliff here with the inflation expectations going up while nominal yields are going down, then real yields are obviously responding even faster. And that is a gold positive rate cuts now priced in at four.

For the years, as you mentioned, John, as well, I think these are all just signs that basically mean that if you are a long-term investor in gold and you worry about the world as it is, this is not time to exit the market. But we will see some short-term volatility.

You mentioned silver and yeah, as per usual, as we say, silver is gold, but on steroids. And yesterday it was turbocharged steroids. And the part of that is twofold, well, threefold. First of all, that we're heading into a correction. But then the correction is being magnified by the fact that the

In the wordings on the fact sheet that was delivered by the White House, - they basically said that energy and other certain minerals - that are not available in the United States - should not be exposed to reciprocal terrorists.

And the market basically came to the assumption that silver being a very highly sought after metal, but also imported in large quantities into the US could fall into that category. So we basically saw that

premium in New York silver over London completely disappeared. And that's what I'm showing you on slide nine, the spread between the May contract and the spot silver. And today we're actually back to flat. So this movement of metal to New York in COMEX monitored warehouses in the past three months, which is basically seeing silver stocks rise by more than 50%.

That basically means we now have a lot of silver stock in warehouse in the US, which is not really needed. So that potentially could weigh on supply in the short term and thereby weighing on prices as well. So this is really the

the flush out period that we need to go through, unfortunately. And then later on, depending on the depth of recession, that really will determine what kind of rebound we're going to see in silver, because it is obviously dependent on the industrial demand as well.

Just putting in the chart there on slide nine as well, we see the uptrend from the first quarter of last year. We have not reached it yet. At the same time, we also have a 61.8 retracement level coming in at 31. So that area just around 31 really needs to hold for this not to get more ugly than it is already. Yeah, it's an ugly chart there. There's the choppiness of it. The trend is really just not good.

Very friendly. It's an uptrend still, but it's not a very friendly one with that chop around. OK, I'll get to you, Ola, on crude in a second. I just want to talk to a couple of points here. So just putting together the impact of these tariffs together with some other factors and why the market is pricing those Fed rate cuts. I think we're at 100 basis points now, which is a three and a quarter to three and a half percent.

I think it's fair to look for it to go at least 125 basis points by the end of the year and maybe even 150 basis points. So to a 275 to 3% terminal rate. And it's kind of funny if you look at the forward curve, how the market prices that. So it prices some further easing through year end and even into like April of next year with that terminal rate a bit lower.

around 3% for April of next year. I suspect it'll be front-loaded. I think by April of next year, whatever recession risks we face will have been faced and we'll have troughed and we'll be back on some sort of recovery trajectory. But maybe I'm premature in that. I'm too front-loading in my anticipation around here. But

Let's put it all together. So we have the tariffs. And first of all, we need to understand whether these tariffs will go through. April 9th is the date they're meant to go through. Trump said yesterday, you know, we're open to dealmaking if it's a phenomenal deal, yada, yada.

Do some of the trading partners step forward with something dramatic to change its trajectory? I suspect not so much on the Southeast Asia and China tariffs. I don't think that's possible, although he did make some bizarre mention of TikTok and why on earth TikTok has geopolitical importance beyond just getting rid of this nuisance in the U.S. public space. I don't know. But anyway, that needs to come and go, that April 9th date.

And we'll see if the current tariff schedule is in place. I have strong suspicions it won't be for many trading partners, including Europe, maybe some kind of deal reach there. Certainly, I think the Canada and Mexico can agree on something that, oh, yes, we've addressed fentanyl issues and we'll go to the 12% level. But I think that 12% level is going to stick. But let's put together those recession risks. So some form of tariffs at current levels or maybe even slightly lower for some of these countries.

is essentially a tax on consumption. So if you're paying money somewhere in the system for tariffs, it's a tax, and your real ability to spend elsewhere is lower. So it is recessionary. We have the Doge cuts. They've kind of underwhelmed, but they are still disruptive and still going to impact growth at the margin, certainly some fiscal retrenchment at minimum relative to the excesses of the Biden era. They've wanted to front load this in any way because of the, you know,

Some of the U.S. growth was down to illegal immigrants flooding the country. You have the uncertainty, and I think this is widespread in corporations, on what to do. Is this tariff schedule going to stick or not? That is very disruptive in the near term. I think further out it could be quite encouraging of growth if there's some dramatic reinvestment in the U.S., but for now a growth drag. And then there's, I think, and very important, is the negative wealth effect from inflation.

these markets, well, the market meltdown, if the market continues to sell off, especially given that there was a recent, and I'm forgetting if it was Wall Street Journal, who it was saying that

the top 10% of earners in the U.S. are responsible for 50% of the consumption in the U.S. And a wealth effect, therefore, would be very dramatic into the real economy if these people are feeling a bit more cautious and spending less because they're feeling less wealthy. So it could be a special risk of the negative wealth effect in this cycle. So we put those recession risks together, Ola, and you'd think, well, that's going to be not so great for crude oil demand. And yet,

we see a huge move yesterday what is this all about obviously opec i'm going to spoil it a little bit but what is this all about what do you think what do you think is up with opex game here well as i as i write on the slide 10 here this is uh most certainly a a day where we saw a crew roll being hit by a double blow um

Earlier in the day, we had the weakness led by the tariff announcements and the risk of recession driving down the overall demand. US and China are obviously the world's top two consumers. How will these tariffs impact both of these countries? So that has already set the stage for some weakness.

I would say somewhat surprisingly, OPEC+ they met remotely and basically agreed that from May they would double down on their production hikes, basically making a much bigger increase than the previous had agreed to.

And it just really is a strange thing to announce on a day where prices are already under pressure. And it does make, well, you kind of wonder what's the motivation behind it. I think there's probably two things. First of all, most of the sanctions,

and secondary tariffs against some of the major producers, Iran, Venezuela and Russia, potentially could have a negative impact on their production in the coming months. And that will have to be mitigated by others. And that could be the most obvious one. But then at the same time, with WSI crude trading close to the mid-60s right now, we are basically approaching levels where

where the where the where service basically points to us profitability of new wealth is going to be be negatively impacted. So perhaps in the short term, OPEC is basically willing to sacrifice price at and instead of look for regaining some of the market share that they lost in the in the past three to four years. And it seems like an

and a potential obvious reason why we are, why we're seeing these two things happen at the same time. So looking at the chart there, slide 10 of the Brent crude chart, you can see it's really an important level that we are down to approaching that 68 level where we bounced off on several occasions in the past few years. If we do break, then there could be an extension. For now, we're maintaining our 65 to 85

range for this year, which we issued back in December. But obviously, it's clear for everyone to see in the short term the risk of that projection is skewed to the downside. All right. Thanks, Ole. And I'll let you go from here. I think I'm going to talk us through a couple of economic points, unless you want to hang around and add anything. But I just want to rewind a little bit to slide seven with the challenger job cuts out earlier this week. This is the worst reading for challenger job cuts in absolute terms, 275K, and

Besides anything since 2000, except for the pandemic craziness. So that's a remarkable figure. And then you had the ISM Services Employment Index suddenly jerked lower to 46.2, suggesting contraction in hiring after one of the stronger months in the last couple of years, the month prior. Very choppy survey there. Other data is not pointing to any, well, not any,

It's pointing to less strain in the labor market. We had the initial claims within range at these incredibly low levels yesterday, although the ongoing claims did post a new high above 1.9 million yesterday.

The ADP employment change survey was nothing to write home about. And I don't know how much the market will use today's numbers as an excuse for anything. A strong number would just be bizarre and have people scratching their heads, whereas a particularly weak number could be seized upon in terms of heightening recession risks. And importantly as well, we have Powell out speaking today.

Later today, I have it on the calendar. You can see the calendar there on slide 11. He's speaking at 325 GMT, so quite late in the session on a Friday. What does he say? We've had a pretty big move in the forward curve and expectations today.

And usually the Fed likes to talk to the market a little bit to indicate whether they disagree with what the market is saying or want to – and therefore want it to move back a different way or whether they're sort of chiming in and agreeing with what the market is saying. They did trot out the word transitory in describing the impact of inflation from tariffs. So do we get sort of a pushback or sort of an acceptance but with caveats? I would lean a bit towards the latter aspect.

accepting what the market is saying, but with some caveats. But interesting to see anyway, in any case, what the Fed is chiming in with here on these tariffs. They don't like to talk about government policy at all, but they do have to, of course, indicate something on where they see the economy heading in the wake of this.

You can see all the calendar items for next week. I really don't want to pull much out there. FOMC minutes midweek and the CPI is inevitably an interesting one next Thursday.

More interesting, I think, if you can go to the links in today's must-reads and must-listens on slide 12. Only a couple there, but Wolfgang Munchau talking about the end of globalization and Europe can't fight a trade war. A very balanced, I think, assessment of what the risks are here. It's the end of globalization, but what on earth does Europe do? Is there such thing as...

you know cozying up to china when china is an incredible competitor with its mercantilist policies etc and i think that really is a huge question here it's pretty clear that the us is very interested in a decoupling from china but to what degree is it foisting that decoupling on at least the americas uh you know mexico canada maybe parts of south america brazil by the way very integrated with chinese demand from the commodity angle

And where does Europe sit with that, I think, is an absolutely critical question to understand here. Do we see the Eurozone responding in retaliatory fashion or looking for a dealmaking with these tariffs?

Think is the next really critical question here for the for the euro for the eurozone growth the eurozone outlook geopolitically and everything else looks like the Europe has assessed that 290 billion of its exports would be affected by the tariffs So some 58 billion in tariffs would be paid to the US by somebody if if we continue at current levels of exports to the US and

The other read on the appendix must-reads listens list is from Marcus Ashworth. You know, growth worry is not just in the U.S., and I think that I kind of ran through that earlier in the podcast. Beware the risks of Europe, also from StrongFX. Just a thought piece on before we get carried away with, you know, the positivity for Europe trade, we need to consider those things. I think it's a positive for Euro, the story, long term. But, you know, in relative terms, the adjustment need to be made by a

A multipolar world where we're seeing the U.S. doing what it's doing is not a positive Europe story, even if the fact that Europe will be looking to invest internally and is moving forward with fiscal is positive for the euro single currency. All right, I think I will call it a wrap for today and for this week. I'm not willing to call any sort of bottom in risk sentiment here. That could be very mistaken. I have no ability to...

foresee things better than anybody else. It just feels like we need to continue to make an ongoing adjustment to what is unfolding here, which is heightened recession risks. Very interesting to see, again, what companies will be saying, starting with the end of next week and then following through to especially those companies that are being most directly impacted by these tariffs. Assuming the entire tariff schedule, once again, does go forward on April 9th, which is next Wednesday, according to the White House's

plan here. That's it for today and for this week. Please stay careful out there and we'll be back next week with the Saxo Market Call.