Who made Trump blink? | Insights | Liontrust Asset Management PLC

In this short video, Phil Milburn discusses the reasons behind President Trump delaying the imposition of tariffs above 10% on countries other than China and what this means for the global economy and markets.

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Hi, it's Friday the 11th of April and I'm substituting in for James Klempster this week to pause for a few moments and reflect upon developments in the macroeconomy and how those have impacted markets this week. The obvious development and the key word is pause, is Trump pausing the reciprocal tariffs on all countries except China, leaving the 10% in place for those countries affected. This was clearly taken incredibly well on the day by the equity markets with the S&P up 9.5% on the day and Nasdaq up over 12%. But markets are remaining very volatile with the next day the S&P falling 3.5% and the tech heavy Nasdaq down a little over 4%, taking their respective returns year-to-date to minus 10 and minus 15. On this side of the Atlantic there's been a little less impact, the FTSE remains down year-to-date but only just when you look on a total return basis. And the DAX, the German index, is actually up a few percent year-to-date, partly driven by the German promised fiscal stimulus, with an agreement made this week to form a government that now just needs voting through. So slightly good news off of the equity markets this week, but still a long way to go on the tariff front. The question is, what actually made Trump blink on tariffs, given it hadn't reacted to the big fall in equities? I actually believe this week it was the bond market, with Tuesday seeing the beginnings of some dislocation in the US treasury market. The cause of this dislocation, there's been a big debate in the market what caused it after the fact, some say it was China selling on Tuesday, selling US treasuries. I don't actually think this was true, I've seen no evidence of this. Some say it was a loss of faith in the US government. It seems odd that that would happen on one day now rather than after the self-proclaimed 'Liberation Day'. So I think the most likely explanation is the beginning of the unwind of some leveraged trades. In particular, there's a trade in the US that is used a lot called the 'basis trade'. This is where hedge funds sell the government bond future and buy the underlying government bonds, the US treasuries. There's only a very small gap, 4 to 5 basis points normally between the two, and so you think why bother? The reason they bother is they can apply a lot of leverage to this, 50 to 100 times. And so it's estimated there's up to $1 trillion of exposure in basis trades in the US, which are close to causing a systemic risk to the market. And there were very faint rumours on Tuesday that the Federal Reserve might have to intervene. At the time it wasn't necessary, the market was volatile, but it was still functional, so the next day they started to be a little more calm, but certainly it seemed the proverbial bond vigilantes has been what's made Trump blink. But it's not a very hard blink. Chinese tariffs are now up at 145%, which is the level saying 'we just don't want to trade with you'. Having the world's two largest economies not wanting to trade with each other is certainly an impediment to growth. Other impediments remain are the uncertainty caused by all the Trump tariff discussions which is impacting both consumer sentiment and therefore spending and business sentiment and therefore investment. So some of the damage is already done and growth forecasts have been revised down but the fact that Trump now blinked has removed some of the overall downside risk to economies and therefore the market. So this week has very much been about diversity by equity markets is helping, as it has year-to-date, and diversity by asset class and having that grasp of what is driving the bond market and forcing Trump's hand. We expect, as does everyone else, a huge amount of volatility ahead as this tariff policy works through the coming months and we will endeavour to keep you updated over those months of what is happening, how this impacts markets and what our thoughts and insights on those are. So for now I will wish you a great weekend when it comes and we look forward to updating you again soon.

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