• Asian markets started with an accelerated risk sell-off this morning with indices tumbling from 5.5% (South Korea), over 7%+(CSI 300 & Nikkei 225) to 13.2% (Hang Seng). China on Friday matched Trump’s 34% general tariffs for US goods which was a clear sign of the trade war escalating. It also highlighted that the Trump tariffs’ sheet doesn’t provide any kind of worst-case-scenario that could be mitigated in case of successful negotiations. US officials indicated they don’t intend to backtrack on their aim to reduce trade deficits. More (e.g. sector related tariffs) still might be on the cards. Trading partners, including the EU, are preparing retaliation measures. The complete absence of visibility makes it impossible for markets to try to make any assessment yet on the final outcome in terms of tariffs or trade flows. US President Trump and other officials currently indicated that trading partners (e.g. Japan) are prepared to negotiate, but the outcome remains unpredictable. Unpredictability a fortiori applies to the outcome regarding growth (recession, how deep of a recession?) or inflation. In this context, fiscal and monetary policy makers will also face a (prolonged) period of ‘flying blindly’, with ample risks of policy errors.
• Regarding monetary policy, markets assume that central bankers at some point will (have to) step in. For the ECB, chances of a scenario of below trend growth and a potential deflationary impact of a negative demand shock are seen as opening the way for additional rate cuts beyond the April meeting. Markets now discount the ECB to cut rates to around 1.5%-1.75% (well below neutral) by the end of this year. Things are changing fast these days, but we remain skeptical whether inflation will allow the ECB to move to stimulatory territory anytime soon. In this respect, several EU governments, including the prospective coalition in Germany, is signalling fiscal stimulus to address the fall-out from the tariffs. Even so, Bund yields today again decline between 10 bps (2-y) and 2 bps (30-y) admittedly with yields well off the intraday lows. The decline in EMU swap yields is much smaller compared to Bunds. As was already the case last week, intra-EMU spreads against Germany are widening (Italy +6 bps, Spain, Portugal, Greece +4 bps). US yields opened deep in red this morning (about 20 bps at some point for the 2-y yield), but completely reversed the earlier decline(currently 2y flat, 30 y + 11 bps). Money markets have ‘scaled back’ rate cut bets for the eoy 2025 from 125 bps to about 100 bps. This of course is still far away from Fed Chair Powell’s wait-and-see guidance last Friday. Still, maybe Powell’s comments have helped to temper expectations on a (too cheap) Fed put. This kind of sharp intraday moves without high-profile news of course illustrates the absence of any visibility. The EuroStoxx 50 for now mitigates losses to 5.5%. US indices started with losses of 4%+. On FX markets, the major USD cross rates today showed no clear directional trend. Amid still wide intraday swings, the TW DXY index trades modestly higher at 103. EUR/USD trades little changed near 1.0955. The yen still marginally outperforms (USD/JPY 146.7 from 146.9). Smaller, less liquid currencies remain in the defensive. EUR/GBP blew away the 0.8474 YTD top to currently trade near 0.8575. Also the likes of the Swedish krone (EUR/SEK 11.50 from 11.0 at the open) and even more the oil-sensitive Norwegian krone are fighting an uphill battle (EUR/NOK currently at 11.95, intraday >12.00, to be compared with EUR/NOK <11.30 end last week). The zloty (EUR/PLN 4.28), and the forint (EUR/HUF 408) are meeting headwinds too. The Czech koruna outperformed, regaining part of Friday’s loss (EUR/CZK 25.16).
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