A U-turn or Just a Temporary Reprieve?
236 Monday, 28 April 2025 12:49
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In recent days and weeks, Trump has signalled a willingness to compromise on trade tariffs, which fuelled a market rebound. Press clips showing how Scott Bessent and Howard Lutnick (Treasury and Commerce Secretary, respectively) managed to convince Trump to halt his tariff plan are quite reassuring. This US administration is, in the end, unwilling to risk a major financial blow up to reach its objectives. Damage control remains the keyword. Trump also softened the tone on the Fed, apparently understanding (under market pressure) that central bank independence is a cornerstone of macro-orthodoxy that cannot be challenged.
- On trade deals, our view remains unchanged: Trump is pursuing a negotiation tactic that consists of bullying trade partners to get better terms. We continue to believe that trade deals will be reached. Ongoing negotiations with Japan, India, and the EU support this constructive view. Yet, the absence of an agreement with Japan (as we go to press) highlights the complexity of the process and the difficulty of accepting Trumps’ demands. Japan is reportedly pushing back against US efforts to bring it into an economic bloc aligned against China. Japan is nonetheless likely to benefit from a good tariff deal with the US, being a close ally. Attractive valuations also have us Overweight Japanese equities in our asset allocation.
- With regards to Powell and the Fed’s independence, Trump also looks receptive to market concerns about the importance of preserving central bank credibility on inflation matters. This is a positive, also reinforcing our view that Trump is prone to flip-flops.
More generally, Trump’s falling approval ratings, rising uncertainty expressed by households in consumer surveys, the equity, bond and FX market corrections in March/ April and the confusion generated by the frenetic announcements on tariffs have forced Trump to step back. Until recently, the unknown was the level of pain Trump and his administration were willing to tolerate. Now we have a clearer picture about their red lines. Moreover, Scott Bessent looks to be an increasingly moderating force that instils rationality.
Going forward, visibility remains nonetheless limited. Trade tariffs have already been increased and the implications on global supply chains, consumer prices, aggregate demand, and economic growth remain to be seen. Interventionism will remain high and there are still risks heading into 2026 regarding the candidate that will replace Jerome Powell as Fed chair. His term ends in mid-May 2026. If consumer uncertainty remains high in the coming months, a sharp growth slowdown may occur in H2, preventing a swift and persistent rebound in US equities.
Nonetheless, we advise to tactically neutralize short positions on US equities. Our strategic stance remains neutral on global equities, but a tactical Overweight makes sense as China is also softening the tone on trade wars, the Fed is leaning towards a dovish tilt if risks on growth and employment materialise, and some potentially better news on trade tariffs can sustain the upward momentum. We increased US equities to OW in our Sharpe 1 multi-asset strategy two weeks ago, in anticipation of a softer stance from Trump. But it is important to remain agile, i.e. take some profits if equities rebound significantly.
- Tactically, a mean reversion strategy on US equities is appealing. We provide a list of 20 US stocks that have been hammered and with potential to experience a swift rebound based on three criteria: 6-Month beta to the S&P 500, percentage change versus 50-day moving average, and 3-Month 25-Delta Skew (Put-Call Spread), reflecting the extent to which investors are overvaluing protection. Only names with a market cap over USD10bn and rated a Buy by our US research partner (Argus), were considered. Most names reflect persistent angst on trade wars. Despite the ongoing rebound, several technology and consumer discretionary names continue to appear in this mean reversion basket. Trade sensitive names as well.
What about Europe? As the earnings season is kicking into higher gear in Europe, we refresh our German stimulus basket which remains alive and an interesting alternative to playing Trump long vs. Trump short. We have explored the theme with our equity analysts earlier in March and provide an update on the performance of our German stimulus basket composed of 23 stocks, with a significant bias towards industrials and materials.
Week ahead: In the euro area, GDP estimates for Q1 and the preliminary CPI report for April are worth considering as they may influence ECB’s decisions later in Q2. In the US, the ISM survey and the job market report for April will help evaluating whether uncertainty has started to take its toll on the US economy. Earnings season: More than half of the companies listed in the S&P 500 have yet to report. Microsoft, Apple, Meta, and Amazon will release their quarterly earnings this week. In Europe, almost 90 companies will report earnings, of which there will be a flurry of financials (HSBC, UBS, Barclays, Société Générale, Credit Agricole, ING, Deutsche Bank, BBVA, Santander, Caixabank, and Swedbank, among others), some oil and gas (BP, Shell, TotalEnergies, Repsol), pharma (Novartis, AstraZeneca), and other cyclical companies (Mercedes Benz, Volkswagen, Adidas, DHL..).
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