Captain Chaos Blinked – have recession fears peaked?

Marcus Padley | Marcus Today

What's happened?

• Trump blinked - pausing Tariffs for 90 days on all countries except China.
• S&P 500 +9.52%. NASDAQ up 12.16%. Dow Jones up 2952 points (7.87%)
• Australian SPI Futures up 490 (6.62%).
• Keeping a 10% tariff in place for all (?) countries.
• Don't think the sector-specific tariffs (steel, aluminium, autos) are reduced. Still in place.
• To give time for negotiations - that's the excuse, but really it's about the bond market (see below)
• Policy on a whim - Bessent says, "This was his strategy all along". Yeah right. Says Trump had used the tariffs to create “maximum negotiating leverage for himself” - probably true. One White House official was in front of Congress at the time of the announcement and had no idea - "Looks like your boss just pulled the rug out from under you". Its still policy on the run. There will be more chapters.
• Gone to war with China - raised their tariffs from 104% to 125%.

Thoughts:

• It's about the bond market - Trump - "I saw last night that people were getting a little queasy. The bond market right now is beautiful". In other words, it's not. Or wasn't.
• See the bond market articles last night (The Financial Times was all over it) - Someone, It looked like the Chinese or hedge funds, were selling worrying amounts of long-dated (10-year and 30-year) bonds (the 30-year bond yield has had an extraordinary and "dislocated" rally, which threatened the stability of the US bond market.

Global financial stability was becoming a threat - When the UK, Canada and Japan say they'll support the bond market because tariffs are threatening global financial stability (the US bond market), you do something. He did something. He had to do something.

• Trump presumably understood the dire consequences of that (the bond market funds the US's $36 trillion in debt) and realised he had to do something. If it was China pushing the bond market around then they now know how to get to the US. More likely it was hedge funds unwinding "basis trade" positions (look it up). Even if it was hedge funds not China, China still now know how to get to the US. But it matters not.
• Very foolish - The White House is trying to isolate and ridicule China - Bessent says, "You might even say that he (Trump) goaded China into a bad position. They responded. They have shown themselves to the world to be the bad actor" - Not good. You don't ridicule China.

Conclusions

• Recession Fear just peaked - For the moment. Goldman Sachs, for instance, just cut the chances of a recession from 65% to 45%. That's the message. 
• There's a Trump Put after all - But is there? He didn't do this out of choice. He was spooked.
• The White House has singled out China - Very dangerous. Cornering a nuclear power (?!). Making them look stupid. They probably haven't thought that one out. It could backfire badly. Very badly. They own $800bn of US Treasuries. It would have been MUCH better to include them.
• We are not out of the woods on the main issue - the bond market. China now knows what to do to retaliate. They can also raise tariffs.
• We are in the middle of a short covering rally - The US has had but a couple of hours of trade to respond. It was doing 200 miles an hour with its hair on fire. Not sure the open today is the moment. They need time for sober thought.

This is not about Trump, criticising Trump, changing Trump, analysing Trump, being emotional about Trump – it's about exploiting the volatility (and opportunity) he is presenting. Some of you will just stand back. Some of you will be paralysed. We have to do something.

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