2025.04.07 Weekly

Peak escalations?

10 min readApr 7, 2025

It’s been some very wild market conditions lately which feels very reminiscent of the pandemic crash, and yet the fact that it does, makes it feel overly emotional. I try to put those sentiments into context this week by taking a deeper look at Trump’s Liberation-day tariffs, and the fallout and responses from various countries.

With economic data continuing to be solid, this sell-off is clearly all about tariff-induced recession risks. Thus the key question in mind is whether we are at the ‘peak’ of trade war escalations. Realising how nonsensical the reciprocal tariffs are, suggests to me that the reciprocal tariffs are nothing more than a negotiating tool. At least, that seems to be the only way one might possibly make sense of it, and it might be working… With a few exceptions, there has been a general willingness to negotiate as many countries expressed a desire to open dialogue with Trump, send delegates to DC, and to even talk about forging new agreements. This is a significant narrative that is developing in my view, and one that could greatly negate the added recession risks fueled by the extremely high reciprocal tariff rates that sent the SPX falling another 10% post the announcement. Though some countries have been more defiant, namely Canada, China and Europe who’ve all implemented or are planning retaliatory measures, the entirety of risks is no longer wholly pointing in one direction.

Market reaction has become more extreme at the open with ES futures going down as much as 5.44% lower from the Friday close, and SOFR pricing in a full 5 cuts (125bps) by the end of year in the chart above. For markets that likes to be two steps ahead, the slowly developing narrative in the background could start to weigh in from a strategic point of view. ES futures currently puts the S&P500 around the 4800 handle, which would put the SPX earning multiple in the high 17s. With very little evidence an imminent hard landing that would justify 4 — or even 5 — rate cuts this year, these levels appear strategically reasonable for taking on risk.

LIBERATION DAY

Trump announced a 10% baseline plus an additional reciprocal tariff rate that effectively took tariff rates well above market expectations of about 20 more percentage points and SPX falling 10% in the following 2 sessions.

Tariffs were enacted by Trump declaring a national emergency due to national security and economic security concerns over US trade deficits under the International Emergy Economic Powers Act. The baseline floor tariff went into effect on April 5th and is said to be designed ‘for all countries to avoid circumvention’. Reciprocal tariffs will go into effect a week after the announcement on April 9th.

The real kicker in the announcement is the reciprocal tariffs. It attempts to address the so-called ‘economic security concerns over US trade deficits’ based solely on trade deficit amounts with each country. In other words, the numbers listed under the ‘Tariffs Charged to the U.S.A’ column isn’t actually the tariffs charged on US imports, but is simply a country’s net exports ratio, divided by 2.

Not only is ‘Tariffs Charged to the U.S.A’ completely inaccurate, the methodology is also nonsensical. Take for example South Korea where I’m currently based — a huge exporter of semiconductors with absolutely zero natural resources. Considering South Korea is one of the top 20–25 wealthiest countries in the world, it’s success from a war-torn poverty-stricken country just 60 years ago comes from added-value processes from imported resources. So while South Korea may have a sizeable trade surplus with the US, it also has sizeable trade deficits with other countries that makes trade with the US possible. Extrapolate that to other countries and what we have is a complex web of international trade where one country’s surplus is another’s deficit. Bottom line, while we may understand the logic of ‘we’ll charge you for whatever you don’t buy from us’ in an attempt to narrow the deficit, the logic is flawed as it grossly ignores the economic realities of why those trade deficits exist in the first place — i.e. the US being a consumption-driven economy rather while others are export-driven, and the US economy being Services-driven than Goods/manufacturing-driven, for example.

But does it matter that the reciprocal tariffs do not make sense? Perhaps not in the grand scheme. The US spends a lot of its resources on being a stabilising force in the global world order, and it’s worth acknowledging — though indirectly, that this is probably the single most important US export that is largely unpaid for. So perhaps each country should be highly motivated in finding some common ground with the US, help the US achieve its desired levels of ‘monetary and fiscal security’ as recognition for their important role in the world. And perhaps these nonsensical tariffs are the first steps in bringing countries to the table in support of the US, and indirectly, global stability. Personally, I’m not totally against this but let's just hope it works.

L-DAY REPONSES

Canada & Mexico

Tariffs on Canada and Mexico over fentanyl and migration will continue while those conditions persist. USMCA-compliant goods will continue to receive exemption from fentanyl-related tariffs.
Carney: Canada will impose 25% tariffs on all vehicles imported from the US that are not compliant with the USMCA trade deal, previously announced retaliatory tariffs will remain in effect. Every dollar raised, about C$8 billion before remission, from these tariffs will go directly to our auto workers and companies. Spoke to Chancellor Scholz, looking to strengthen ties with Europe.
Sheinbaum: built a good relationship with the US through dialogue and cooperation after Trump’s tariffs announcement. A lack of new US tariffs on Mexico is good for the country. US tariffs linked to fentanyl and migration could drop to 12% from 25% with greater collaboration. Looking to sign trade agreement with EU, taking measures to mitigate the effect of tariffs on German automakers in Mexico.

China

China announces extra 34% tariffs on US goods imposed from April 10th. Adds 11 US companies to the unreliable list. Announces restrictions on some rare earths related items. Starts probe on medical CT x-ray tubes imported from the US. Halts imports of poultry products from two US companies. Suspends export qualifications for 16 US companies. Probes Dupont China on antitrust violation. Hong Kong Financial Secretary: will not implement retaliatory actions against US tariffs.
China Foreign Ministry: severely violates WTO rules and harms a rules-based international trading regime; urge US to correct wrongdoing, willing to communicate with US on important issues such as economy and trade. On EU trade commissioner visit: both sides agreed to restart talks on minimum price commitment on Chinese EVs as soon as possible.
Trump: China played it wrong, they panicked — the one thing they cannot afford to do! TikTok US spinoff deal (which was largely finalised on Wednesday) was put on hold after China indicated to the White House that it would not approve. Trump extends TikTok deadline for 75 days. Trump: We look forward to working with TikTok and China to close the deal, we have made tremendous progress on TikTok deal.

Europe

EU preparing countermeasures against US tariffs if discussions fail. EU members are set to vote on April 9th on countermeasures to US Steel and Aluminium tariffs. Germany and France push for a more aggressive tariff response. German Economy Minister Habeck: still some time for EU to seek an agreement via negotiations, crucial for the EU to react in a united way.
France’s Finance Minister Lombard: EU response to new US tariffs will be proportionate and meant to bring the EU and the US to the negotiating table, EU is discussing a response to Trump tariffs on digital. French government Spokeswoman: there will likely be a first response in mid-April and then another one in late April, could target digital services in reciprocal measures via retaliatory taxes on US big tech. French Industry Minister asked if EU should put tariffs on Boeing: no details decided, that will be discussed next week.
Spain’s Economy Minister: unfair and unjustified, if there is no room for negotiation. PM Sanchez will announce a plan in response to US tariffs to protect companies and consumers with €14.1 billion plan that includes €7.4b new financing, to ask the EU to activate special framework on state aid.
Norway Prime Minister: we will negotiate with the US on tariffs if given the opportunity to do so. Italy’s Foreign Minister: aim is to have US tariffs halved from 20% to 10%, in line with the UK.
UK Business Minister Reynolds: US remains a friend after tariffs, 10% tariff not fair reflection of UK-US trade. I don’t think there is an argument for US tariffs, will continue to work to remove tariffs. I think these tariffs can come off. British Foreign Minister Lammy: We have been absolutely clear that all options are on the table in a trade dispute with the US. UK offered to cut tariffs on US beef and fish.

Others

Japan PM Ishiba to talk with Trump over phone next week.
Australia PM Albanese: would not retaliate.
Taiwan top security official is in US for talks. Tariffs have a significant impact on Taiwan’s electronics exports
Isael’s Finance Minister: formulating necessary steps in response to Trump’s tariffs.
South Korea Foreign Minister Expresses Concerns on US Tariff, South Korea US Japan Ministers to Continue Communication on North Korea.
Cambodia to lower tariffs on some US imports to 5% from 35%.
Vietnam Party Leader Lam holds phone call with Trump, ready to cut tariff to zero, ask US to do the same, agreed with Trump to discuss and sign bilateral agreement to concretize commitments on zero tariffs.

DATA REVIEW

U.S. MARCH NONFARM PAYROLLS +228,000 (CONSENSUS +135,000) VS FEBRUARY +117,000 (PREV +151,000), JANUARY +111,000 (PREV +125,000)

Somewhat mixed, but a strong report despite some downward revisions. March job gains massively beat expectations while prior 2 month revisions totaled -48k. That puts 1st quarter job gains at 456k, or 152k per month putting it above the trend growth rate of approximately 125k per month.

What’s particularly encouraging is above trend growth gains are seen in the largest industry sectors by proportion of the total labour force — Trade/Transportation, Education and Health, Leisure and Hospitality, Professional and Business services.

Wage growth also picked up last month driven by Leisure and Hospitality accelerating to a 3month annualised rate of 6.5%, and Trade/Transportation services bouncing back sharply.

JOLTS openings missed expectations as the INDEED index points to further loosening. Hires maintains a steady upward trend since the mid-last year.

Unemployment claims remain at low levels.

ISM REPORT ON U.S. NON-MANUFACTURING SECTOR SHOWS PMI 50.8 IN MARCH (CONSENSUS 53.0) VS 53.5 IN FEBRUARY

ISM Services missed expectations by 2.2pts and 2.7pts lower than the prior month. Though Business activity strengthened, the fall in the headline index was driven by a sharp drop in Employment and continuous declines in New orders and Export orders.

I will leave aside the usual review of market technicals this week as they are all essentially saying the same thing — ‘extremes’, and I’ll post on twitter as the week progresses if there is anything of note.

A few charts…

Change in Economic surprise index has seen the US data momentum turn positive, and turning negative in most other regions. Is that the end of the end of US exceptionalism?

EUR still puzzlingly a strong performer and CHF had an exceptionally strong week — I can only presume this is due to some unwinding in the higher beta European crosses amid the risk off. Interestingly the JPY hasn’t been the top or even a strong performer in this environment.

ES at the 61.8 fib retracement and closing down on the end-of-2023 demand imbalance.

To highlight how extreme the market action has been, there’s only been a handful of times the ES has deviated from its short and long-term moving averages to this degree. Questions — Are we in a similar supply-shock at the onset of the Covid pandemic? Are we on course for a hard landing recession like we saw at the onset of the last GFC?

ES daily RSI was nearly at 18 earlier and starting to recover towards the 20 level, but just to highlight the current extremes, it is also quite rare to see RSI at these extremes. The above chart show below 20 closes of which there have been 6 instances, for RSI closes below the 30 handle there have been 40 instances (excluding all repeated signals with a 1month of the original).

The decline in the 10yr yield stopped at the trendline projected from the Aug’22 and Sep’24 lows. One to watch while we have negative stock/bond correlation to see in Bonds agree that recession risks have been adequately baked in.

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That’s all for now. Good luck trading!