April was the most volatile month for financial markets in several years, particularly impacting equities. Greater than expected increases in US tariffs, followed by almost daily policy changes left investors scrambling to price in the changing backdrop. Naturally, selling and volatility has been focused on US equities, with several days in the month seeing moves in both directions of greater than 5%. Other assets have been impacted, with the US dollar and treasuries seeing notable moves. Understandably, there is increasing concern about US reliability amongst its trading partners and allies.
The so called “liberation day” saw the largest and broadest increase in tariffs imposed by the US in 100 years. No nation was exempt, leaving those that believed they had balanced and fair trade as well as friendly relations with the US, stunned. Following the turmoil in financial markets and offers for negotiations from many countries, the policy was wound back and postponed by 90 days, with the notable exception of China. US equities rallied 10% on the day. Further exemptions, as well as escalations, over subsequent weeks have generated excessive daily moves, although some recovery from the initial lows has been seen.
At this stage, despite changes, the focal point of policy has been the highly imbalanced US-China trade. Escalation has caused tariffs to rise to a level (100%+) that would collapse trade flows between the two largest global economies. Both countries dependency on the other cannot be quickly resolved and the standoff is unlikely to last. While China would lose significant sales if this trade were cut off, there are also few alternative for many goods China supplies to the US. Exceptions on many products appear likely. Nevertheless, the direction of travel is clear and both sides have an increasing incentive to further diversify their economies, supply chains and alliances.
Within markets, potentially most significant, were the movements in US treasuries and the dollar, both of which have fallen. These are traditionally seen as safe havens during market weakness. However, international investors appear wary of allocating further to the US given the increasingly hostile and volatile rhetoric. Furthermore, the weakening terms of trade as well as potentially higher inflation and recession in the US, has left investors nervous. These concerns have been compounded by threats to the independence of the Federal Reserve, the continuation of large deficit spending and high national debt levels. These are likely to be lasting concerns for the market and will continue to weigh on longer dated treasuries and the US dollar.
