Weekly Edge: 14-20 April

Trading Like It’s Caracas, Living Like It’s Connecticut

The Most Important Chart in Macro

A lot happened in markets last week, and it is easy to get lost in the noise. One story stands out, and you MUST pay attention!

The chart above shows the price action of 3”10Y Bond Futures (Blue) and the USD Index (Red). Both fell sharply last week, at the same time stocks were cratering.

Bonds, stocks and USD being sold together doesn’t just signal capital flight from the USA. It signals that USTs are no longer a “safe haven” due to political instability, unanchored inflation expectations and an administration determined to frustrate China’s rise and defend the US position as global hegemon at any cost.

This “doom loop” price action is typical of emerging market, but certainly not typical of the sovereign that issues the world’s reserve currency. Stagflation asset pricing dynamics are a toxic combination for policy makers because it means the FOMC may just need to hike rates into falling growth, else the currency will crater. And it puts a knife in the heart of economic modelling which predicted foreigners would substantially bear the costs of tariffs via exchange rate declines.

We are in a period of heightened volatility and correlations may not persist. But keep an eye on both the USD and long-end of the bond market. In the space of just days we erased weeks of bullish price action spurred by the “Bessent wants the 10Y lower trade”. If we break the bottom of the ranges, there is no technical support and we will enter pure price discovery.

---

Market Moving Narratives

Here are the top five market-moving narratives from the past week's economic and market developments:

1. Escalation of U.S.-China Trade War

   • The U.S.-China trade conflict intensified with substantial tariff hikes—China imposed a 34% tariff increase on U.S. goods, prompting the U.S. to respond with tariffs of up to 145% on Chinese imports.

   • This severely impacted investor sentiment, causing sharp declines in stock markets globally, with notable drops in U.S. stock futures, plunging Treasury yields, and significant currency depreciation for the Chinese renminbi.

   • Markets now anticipate multiple Federal Reserve rate cuts beginning as early as May due to rising recession fears, with the U.S. recession probability in betting markets nearing 70%.

2. Significant Volatility in U.S. Equity and Bond Markets

   • U.S. equity markets saw extreme volatility, marked by sharp declines and partial rebounds. The S&P 500 neared bear market territory, suffering one of its largest multi-day losses historically due to tariff-induced fears, with a potential loss of $5.8 trillion in stock market value.

   • Bond markets experienced turmoil, with the 10-year Treasury yield swinging significantly—from below 4% to 4.45%. Credit spreads widened, reflecting increased risk perceptions and investor stress.

   • The VIX surged to near 60, indicating heightened investor anxiety and widespread market distress, exacerbated by record-high volumes in put options and de-risking by hedge funds.

3. Canada Faces Severe Labor Market Setbacks

   • Canada reported its largest monthly job loss in years for March, driven mainly by full-time employment reductions, elevating unemployment rates and causing declines in labor force participation.

   • The Canadian economy faced further challenges from the U.S.-imposed auto tariffs, critically impacting its automotive industry and highlighting vulnerabilities in North American supply chains.

   • Bond yields in Canada continued to trend downward as investors priced in anticipated rate cuts from the Bank of Canada, suggesting deepening economic concerns.

4. Global Commodities Under Pressure Amid Recession Fears

   • Commodity markets broadly declined, led by significant sell-offs in crude oil and industrial commodities like copper and iron ore, driven by growing fears of a global recession and weakened demand.

   • Brent crude oil prices dropped below $65 per barrel amid rising OPEC+ production and reduced demand forecasts, causing investors to significantly scale back positions in energy equities.

   • However, gold surged to record highs, reinforcing its status as a safe-haven asset in the face of growing global economic uncertainty and volatility.

5. Divergent Economic Signals and Central Bank Responses Worldwide

   • Japan faced falling equity prices, declining government bond yields, and a reassessment of monetary policy expectations, with the market moving away from anticipating rate hikes by the Bank of Japan.

   • The Eurozone grappled with a declining industrial production in Germany and a recession in construction sectors, pushing European bond yields lower and heightening expectations of rate cuts by the European Central Bank.

   • Emerging markets showed mixed results; currencies benefited from a weaker U.S. dollar, but equity markets remained volatile amid ongoing global uncertainties. Cryptocurrencies faced substantial pressure, with Bitcoin notably falling below $80,000 amid broader risk aversion.

---

Economic Data Recap

• Australia saw declines in consumer and business confidence. Westpac Consumer Confidence fell sharply to -6.0% in April from a positive 4.0% previously, significantly below expectations. The Consumer Confidence Index dropped to 90.1 from 95.9. Additionally, NAB Business Confidence fell slightly to -3 in March from -1, in line with forecasts.

• Canada's Ivey PMI dropped to 51.3 in March, down from 55.3, missing market expectations of 53.2.

• Japan experienced a decline in consumer confidence to 34.1 in March from 35.0, below the anticipated 34.7.

• China's inflation rate improved marginally but remained negative at -0.1% in March from -0.7%, slightly below the 0.1% expectation.

• US Core Inflation increased modestly by 0.1% month-over-month in March, lower than the expected 0.3%.

• UK GDP grew positively, outperforming expectations. Year-over-year GDP rose to 1.4% in February, significantly beating the expected 0.9%, and monthly GDP grew 0.5%, surpassing the forecasted 0.1%.

• Germany's inflation rate in March was reported at 2.2%, down slightly from 2.3%, matching market forecasts.

---

Momentum Analysis

Current momentum data and recent market narratives highlight a clear risk-off regime characterized by increasing economic uncertainty and recession fears, primarily driven by escalating U.S.-China trade tensions and weakening global economic indicators.