US and China are slipping into an economic war
25:08 Share

Welcome to the Saxo Market Call. Before we get started, it's important we emphasize that the views and opinions expressed in this podcast are those of the host and guests and do not constitute investment advice or recommendations. All information provided is for educational and entertainment purposes only.

Okay, it is Friday the 11th of April, and a little bit has happened since the one we recorded last week, which was immediately in the wake of the Liberation Day announcements from Trump. And just looking at how to position what is going on in markets. So clearly, we had the drama earlier this week of moving forward with the tariffs, the full tariff schedule that was brought on his lovely chart.

on Liberation Day. That for good reason had the market spooked and then supposedly Mr. Trump saw Jamie Dimon and Bill Ackman crying and moaning on TV about what the implications of this would be. I think, Jakob, you said it was some quote about nuclear winter from Ackman on what this would spell for equity markets and he announced a turnaround or at least a 90-day pause

Maybe the grift and the corruption here is something to shake your head at, but the pause was there, and of course we got that epic comeback in 2019.

risk sentiment. I think a lot of it, I'm sure, aggravated by very large zero DTE options bets because you saw how quickly the price action then faded again yesterday. And now we've come back a little bit from overnight lows in the equity markets. And I found a new favorite follow. I'll go straight to the bottom. If you want to follow along in the slide deck, you can find the link in the podcast description.

This Michael Cao, who's sending out some really good observations on what's going on, I think has put the tweet link there on slide two, just as general positioning of what the lay of the land is here. So clearly with the delay of the tariffs, the 90-day delay against all of the major trading partners, ex-China, obviously,

allow some time for negotiation. Japan apparently first in line. The EU has come out and said they'll pause their retaliations for 90 days. So we have some kind of 90-day period here to sort of save the global economy from this nuclear winter at the same time as a de facto right now U.S.-China trade war that is having its impact. And to what degree will Trump try to extract a

anti-China measures from these major trading partners during this 90-day window. Will China take this line down and retaliate? These are the existential questions, I think, for the global economy and for global markets here. Some good thoughts from him. Nobody's 100% going to be right all the time, but I think this sort of framing the situation is really good from Michael Kao. He also brings up some interesting figures like

There was some company he quoted indicating that global container shipping was down for the week of April 1 to 8 by some 49%. That's not just U.S. That's global relative to the prior week. And for U.S. imports, down 64%. So as he positions it, this is not a trade war situation.

Sorry, this is a trade war. This is not just tariffs when you're talking about 100 – and it's 145 percent by the way. The 125 percent was additional to the original 20 percent on tariffs on China. This is not tariffs. This is an embargo. It's like sort of saying we no longer want to trade with this country, a remarkable set of circumstances.

Any thoughts from the peanut gallery here as we look at the lay of the land or anything you want to add to that, Jakob? I mean, as you say, whether it's 125, 145, 180, I mean, that's basically the same as saying we are not trading with each other. So this is not just tariffs, it's an embargo, I should say. And I mean, just the fact that we had like one day or two days where we thought it was 125,

The administration couldn't even explain it was 145 until yesterday. There's just so much uncertainty. It seems like the inner circle of Trump don't even know. When this U-turn of Trump was announced, his trade representative was in a hearing in the Senate. He didn't even know about it. I mean, he had the memo while he was sitting. There was a great video on YouTube where he's just being...

knocked over by some senator. But yeah, there's just so much uncertainty here. And also, as Michael Cowell points out, this is going to mean that there's a lot of sitting on hands until we figure out what the heck is going on, potentially at least 90 days. And if you're just stopping all activity, you're not bringing in orders to

The damage from that accumulates very rapidly. So you could have, I remember there was some example back from the COVID supply chain time where, you know, one week of disruption costs you one to two months of actual on the ground implications. So those implications start to multiply rapidly.

Yeah, and also just simply the fact that if you're missing parts to your production line, then basically the whole thing grinds to a halt. So, yeah, the potential impact over the coming months could be quite severe. And I suppose that's also why some of the backward-looking data we're getting, and we had inflation earlier,

yesterday better than the other day better than expected. That's yesterday's news. Mark is now looking ahead because they know there's something big coming into these economic days in the coming months. Yeah, I don't want to go there with Michael Cow on how this is a very deflationary development with tariffs in the setup here. He's got some very pointed arguments on that front. But I do like another...

I'm forgetting I've listened to so many podcasts and observations. The idea with tariffs, tariffs are a tax. So if you do have tariffs, CPI does not have what he's called a demand function in this podcast, meaning that if you are – yes, if something suddenly costs a lot more, the CPI index can go up. But it doesn't say how much less of all stuff is being consumed because now tariffs are being paid rather than something else. So it's a –

The impacts are very profound and very mixed in terms of the relative impacts on one versus the other type of product, category, service, everything else. So we'll have some time to digest all of this, of course, in coming months. For now, I think it's not our task to talk about inflation deflation. It's to look at the market reality on the ground. And if you look at the NASDAQ 100 index, which is our favorite technical index to follow for the US market, it's

We've seen this come back, a really remarkable one, really stopped right there around that 19,000-plus area I show on the chart there on slide two. That was the prior major low before the huge downdraft post-liberation day. So that is obviously a key resistance. Above there, if somehow we continue to engineer a recovery, I would argue the 200-day moving average has been extremely important for at least a couple of years back, and that's above 20,000.

$20,200 or $300 there. And you'll note that the lows, the absolute lows, it just blew through that 38.2% retracement of the rally off the 2022 lows, $17,730, and actually touched almost exactly the 50% retracement level at $16,300 something. So it looks like that is the key support now if we're supposed to resume the selling here for whatever reason.

As you mentioned, CPI came in weak, but the long treasury yields not finding any sustenance or reason for support from that. There's the narrative around that I'll talk about in a moment as we roll forward. And I just wanted to show for perspective. So I also put on slide two that quote that somebody indicated and actually checked it myself. The Wednesday rally was the best rally since October 28th, 2008. If you wind back your time,

If you wind back your charts to that, that was in the midst, of course, of the massive global financial crisis. Meltdown was not the absolute low, even though it was the worst day of that whole episode. And it just shows you that these best rallies since XYZ are not something to celebrate necessarily. They're just sort of a symptom that you have very chaotic markets. And you can see that to a degree on our risk indicator there on slide three as well. And this just echoes with what we've seen in the past. So

While you did have that one very brief one-off spike last summer, if you go back to the bigger profound bear market of late 2022, you see that there was a big spike in volatility there, minus three standard deviations on our indicator. But the absolute lows didn't happen until like October. And you can see that those sort of the relevant...

relative risk off at that time was far less significant. So some divergence there. And that was very much the case back in late 2008, where we had these incredible spikes, incredible downdrafts. But the absolute lows in markets actually occurred in an environment of far less volatility. So just because we snapped back, in other words, we can't just say, oh, this is the all clear sign and we're all back to looking for upside. Yeah. I also think, I mean, looking at some of the moves we saw the other day with that 10% move, I mean,

stock like apple moved up 14 i mean if you go into the fundamentals of apple

Everything is still the same. They're still dependent on China. I mean, the tariffs have increased on China. So how come that stock is up 14%? Trading and options, I would suspect. Yeah, yeah. So I think it was more like a buy first, ask later kind of day we had where everyone was just buying. And then, yeah, reality kicks in and things are still pretty bad. Yeah. And I think the more interesting thing is also...

As Michael Cow indicates, to go back to his great thread there. This is a really weird crisis because it can be ended tomorrow with a signature and somebody playing nice, China playing nice and Trump playing nice.

Very unusual relative to COVID, which was actually physically profoundly impacting supply chains, etc. I'm not saying that's what's going to happen, but it's just a very unusual crisis. And then we have the U.S. Treasury market. As indicated, it's really trading nervously. It won't take much more, I think, on instability for it to require some kind of intervention.

And for perspective on just like how unique this is relative to other markets, slide four, looking at the spread of the German versus US tenure yield, which has gone much more negative in terms of the yield that Germany offers on the tenure relative to the US and normally

Of course, according to the correlation of the past couple of years, you would expect that to mean a lower euro dollar. And yet we have euro dollar absolutely screaming higher. That is because of the concerns about the U.S. treasury market. Are foreign holders flushing them? Are people flushing their exposure to the U.S. in general with the future of a U.S. dollar as the gold reserve currency in doubt?

All assets are supposedly headed out of the US. Others are saying, no, no, no, no, this is all about just selling the most liquid instruments first to get liquidity for all the stuff that you need to fund in these times of crisis.

You can get any opinion you want. The only certainty is that the US government, the US administration, the Fed, et cetera, the system cannot afford US treasury volatility beyond a certain level. And we're fairly close to those levels. So I would expect some kind of official response if we do see, for example, the US 10-year heading towards 5% rapid fashion or the 30-year blowing out well above 5%, which it nearly touched or did touch perhaps over in the last 24 hours.

And just while we were recording this, John, China has just come out saying they are hiking tariffs on U.S. imports to 125% from 84% next week, basically saying they will ignore the U.S. if it keeps imposing these tariffs. And with the bond story there, we still have to remind ourselves that two of the biggest buyers of bonds, U.S. government bonds, outside the U.S. is China and Japan. So again, potentially a bumpy day ahead with that announcement.

Cool. Appreciate that. And of course, we have with these markets, we saw that markdown in gold, as you talked about last week quite wisely. So the downside in gold is merely a function of, holy cow, markets are going crazy. I need to just reduce risk across the board. And this has been one of the most popular positions. So you reduce risk. And here we are. We've just screamed back to all-time highs in gold. Yeah, that so-called dash for cash or deleveraging exercise that occurred after Liberation Day,

literally only took gold down by 4%. Again, a small change considering how far it travels so far this year. We are now back to a record high. We reached that both yesterday and overnight. And the story there is, as I put on slide five, is really

Is it the ultimate safe haven right now when you cannot put your, apart from very secure short-end U.S. government bonds, is that really the ultimate safe haven? The market believes so, and obviously momentum there is still quite strong. And we're also seeing it in the sense that it's just –

racing away from other potential investment metals like silver and also platinum. Both of these are obviously struggling due to their industrial metal link with the recession, whereas having an impact there. So gold is really left on its own right now to pick up the demand from disgruntled or nervous investors around the world. So yeah, we got 3,300 as a

as a target for the year and it just increasingly looks like that could be hit sooner rather than later. And I just saw overnight that UBS raised their target for the year to 3,500. So a phenomenal run that is just a really reflection of what's happening in the world right now. And also just consider that on the day where we had this relief rally in equities, gold actually moved high as well. So they didn't buy that for a second that we were out of the woods. Right.

And commodities in general, we've seen this incredible markdown in crude oil, obviously for good reason if global growth is set to crater. Is that the only perspective? There was the OPEC angle. Are they trying to kill you as shale? Is there any sort of adjustment in your view of what's going on there? Yeah, I just put in some of the performances across the key commodities on slide six, and yeah, you're right.

You're absolutely right, John. The pro-cyclicals, not surprisingly, are the ones that have been suffering the most, industrial metals and the energy sector, both troubled by the prospect of a recession, a lowering demand.

But also we've seen this $12 slump within a matter of a week and a bit in crude oil, taking prices down to levels where the Permian Basin in Texas, where producers there are starting to shout a bit louder because we are now hitting levels where some of these productions simply doesn't make any sense economically anymore.

It's not going to have an impact overnight because a lot of this production is being hedged in the futures market. So they have hedges that will take care of the risk in the months ahead. But as they start to roll off and as long as we stay down here, then we will eventually see a negative impact on U.S. production. And that for now looks like what is necessary to stabilize the price action.

All right. And now we are heading into earnings season, kicking off today. And it's very interesting, Jaka, because, of course, earnings season should always be anticipated, especially when you're starting to weigh, oops, do we have the risk of a U.S. and potentially even a global recession from this trade standoff? And I think it is a standoff at this point. And we've had a lot of front running as well of tariff measures. So there's been a lot of maybe

forward demand. Just how this shapes out, I think, is going to be interesting. What are you looking for in this earnings season in general, less specifically maybe than the banks reporting today, the big ones, JP Morgan, et cetera? What are you looking for in this earnings season from general as we start to roll into this today and really hitting into it next week and the following week? Yeah, I mean, there's really no rest for the wicked. I mean,

From one thing to the other, I think this earnings season will be extremely important. And I think what will matter by far the most is, of course, the outlook and the guidance from...

from CEOs and CFOs around the world, the US in particular. I think, of course, the numbers, earnings growth and so on is also important, but it's backward looking. And I think right now it's about the uncertainty going forward. And I actually think that there is a clear risk that we will see a lot of, maybe not a lot, but some companies going out and say we cannot even...

make an outlook or guidance in this uncertain environment as we saw in COVID because, I mean, how should they be able to do that right now, especially if you have a company that is...

relying on input from China or the rest of the world. We have this 90 days pause now. What will happen next? I mean, what will happen to investment plans? What will happen to hiring? What about CapEx? I mean, all of those stuff, forward-looking stuff and planning, I think that will be crucial to watch for the companies. And then, of course, as you say, we are kicking off with the banks today. Banks...

of course, there are some kind of early indicator maybe in the kind of economic health window into the consumer demand, loan growth, all of that. So that will, of course, be crucial to watch what they will go out and say. And as you also said, there's rumors in the market that it was the comments of Jamie Dimon and Bill Ackman and Larry Fink without saying very negative stuff about these tariffs that actually make

made Trump blink. So, of course, they worked. Maybe we all need to get Fox News over here in Europe somehow. Yeah, probably. What's the next administration? Yeah, I mean, when Jamie Dimon went on Fox, then Trump listened, apparently. But as you also said, I mean, Larry Fink was out the other day from BlackRock saying that he actually already thought that the U.S. was in a recession right now and that most of the CEOs he talked to thought the U.S. was in a recession as well. So,

I think some of those comments, I mean, hearing what Jamie Dimon has to say, he apparently has some respect from Trump. So, yeah, that's very interesting. Yeah, but also there's even the direct statements from Scott Besson, this Treasury Secretary, that this is about Main Street, not Wall Street this time around. So if you look at how the pattern works,

of the global financial crisis response. It was, yes, maybe in the teeth of the crisis, just enough social safety net to other things to stabilize the economy. But then it was like extraordinarily loose monetary policy and then almost fiscal austerity. This time around, I think the monetary policy won't be there to support like it was in any way during COVID because we can't afford it. We

Yeah, the focus is on Main Street, not Wall Street. But to what degree is he willing to follow through with that when he sort of wears the stock market results, if you will, as president? Or how much does he care about that when this is legacy building for the big term? It's like, I defeated China. Is that his big ego boost from his time as president? All these questions. So many questions. Yeah. And so I guess more specifically on today's results, of course, we have Morgan Stanley, J.P. Morgan.

Huge banks. Wells Fargo, the Main Street bank, more Main Street focused. So interesting to hear what they say as well, specifically on Main Street and lending activity, credit, et cetera. And the next week, following through with a lot more banks, but as well, maybe the first kind of interesting stock that's a bit more popularly held and consumer-oriented perhaps as well, that being Netflix reporting on Thursday. You can see the overview there on slide 7.

And we're getting a bit on in this podcast, so I may not spend a lot of time here on foreign exchange. But of course, it's very interesting. Huge moves. You can see on slide eight, the volatility levels, as indicated in the ATR rankings, those sort of orange. They're all bright orange now. Those are sort of heat levels. So if you're in the top 20% of volatility rankings over the last 1,000 trading days, you're going to see a lot of volatility.

the color turns orange. And you see gold there. Of course, it's price-based, not percentage-based. But gold there at 7. So this is the seventh most volatile ATR reading in the last 1,000 trading days. The dollar at 160, euro at 56. Very volatile euro. Euro is getting a more safe haven bid together with even more so Swiss than the Japanese yen. I find that quite interesting. And I suspect it's merely that maybe sort of

unwillingness to touch the yen as much or trade the yen as much when U.S. yields are so high. That's traditionally been a key indicator, coincident indicator for the yen. And then on the weak side, so it makes sense to see a weak Aussie very much linked with pressure on China, I think, and what we've seen in some key commodity prices is

Although the CNH has a worse reading than the U.S. dollar in trending terms, you have to remember these are volatility adjusted. So what it means is that the trends are more sort of CNH negative across the board than they are for the U.S. dollar if you adjust for volatility. But interesting to see how China is continuing to sort of be associated with dollar weakness.

We have the economic calendar for you on slide nine. Interesting to see there's so much focus on it. I'm not sure what all it says, but how much is this playing in the popular mind? We'll get that to a degree with the first April reading of the University of Michigan Sentiment Survey today. And we have a couple of Fed speakers today.

with the Fed outlook quite interesting as they deal with these certain times in terms of the impacts of potential tariffs on inflation and economic growth. Busy year earnings calendar next week with Bank of Canada and ECB Wednesday, Thursday, and a few other data points, U.S. March retail sales among those.

Got a great set of links for you, at least I think they're great, on slide 10. In addition to the Michael Cow, very long thread that I sent a link to or put a link to on slide 10. And I don't think I'll run through these all item by item, but please do have a look. Everything from what Arnaud Bertrand calls...

bat shit insane, those are not my words, idea about how Stephen Moran can, his plans for how to sort of do a power play with having your cake and eating it too with the U.S. dollar as global reserve currency. Very long form observations. I think very interesting ones as well. Jeffrey Gundlach, again, along the lines of

People sell the more liquid stuff first, noting how investment-grade bond spreads have recently blown wider and that this does not necessarily mean that they're doing worse than the high-yield stuff. It's just that people know that they can't get prices for the high-yield, less liquid stuff, so they sell their more liquid stuff first as they're dealing with pressure on their portfolios.

Long form piece update from Husband Funds. Ben Hunt for a real big thought piece on the end of Pax Americana, a bit of a counterpoint to the sort of almost glee you see from Michael Every, who was really enjoying this environment because it's sort of falling in line with all the things he's been saying over recent years before it's actually happened.

And then the basis trade. So there's a thought piece on the – not a thought piece, but the basis trade itself and how the Fed could bail it out. That could be the next sort of bailout function if U.S. Treasury dysfunction increases. This basis trade is something we need to track. It is part of the risks around the U.S. Treasury market.

And I put in a tweet there as well from Michael Every about Australia's quote from Anthony Albanese and Peter Dutton. They're promising big business. They will rebuff any push for nations to take a tougher economic approach to Beijing. And Michael Every says, well, that's nice, but –

that defense umbrella and that offshore Aussie bank borrowing in US dollars for your mortgage market, Australia, you've got there. Pity if anything were to happen to it. So it's just to point out that the raw power the US financial system has over Australia and can Australia really back this up with action. And if you don't understand about the Aussie bank borrowing in US dollars and how offshore dollar borrowing has anything to do with the Australian mortgage market,

go to chat gpt and prompt it with what i wrote there on slide 10 why would australian banks need offshore us dollar funding to serve the australian mortgage market and there's a very good answer to that on chat gpt all right a bit exhausting what's what's uh to get through everything that's going on again we have this pause

Does China come to the negotiating table? Do we have to wait for the first deals to gel from U.S. and Japan first, it appears? That's the big one that's likely to come first. So many questions loom here, and we'll see how the uncertainty plays. Have a very safe weekend out there, and we'll be back next week with the Saxo Market Call.