Volatile Week for Markets
What happened last week?
The S&P 500, Dow and Nasdaq climbed by 5.70%, 4.95% and 7.29%. Financial markets experienced significant volatility on tariff developments, better-than-expected inflation data and a drop in consumer sentiment.
On April 9, President Trump announced a 90-day pause on new tariffs, reducing the universal duty to 10% for most countries but lifting all-in tariffs on China to 145%. This led to a dramatic one-day rally with the S&P 500 up nearly 9%.
This week’s economic calendar includes retail sales and housing data. The market will be watching for trade developments and 33 S&P 500 firms reporting earnings.
3 Things to Know
Investors Reducing Risk Levels
We are monitoring how the sharp spike in policy uncertainty can drive down market liquidity. While relatively mild so far, for the first time since the onset of the COVID pandemic in 2020, the US Treasury market experienced selling pressure even as the economic outlook darkened.
(We see this impact distinct from the period of Federal Reserve tightening in 2022 which also drove up bond yields).
This shows “deleveraging” pressure to sell highly liquid assets to make margin calls, including some complex trades. US Treasuries are considered the highest quality collateral for borrowing and therefore, permittable leverage is higher.
The willingness of foreign buyers to add to US Treasury holdings is another question. While the scale of US rate pressure is modest thus far, if US borrowing costs rise while the economy slows, it magnifies the effective tightening of financial conditions that weakens the economy.
US-China Trade Tensions at a High
The “good” news of the past week is that the Trump administration has signaled it is open to negotiate trade deals. This might lower prospective tariffs from the highest levels feared.
However, President Trump has derided non-tariffed trade as unfair, “ripping off the United States” since at least 1987 (PBS). We should expect President Trump to hold fast to that view and expect some higher level of US tariffs over the long run.
Making tailored trade deals country-by-country for the US is a demonstration of executive power in which Trump is very active. Unfortunately, this approach leaves great uncertainty about the rules of the world trading system’s largest economy. This will chill even domestic business investment.
It is likely to have a lasting negative impact on confidence in the US economy from foreign business leaders and investors. A 90-day reprieve to 10% for all countries except China (merely shifts the tariff burden sharply towards China to a level that will likely dramatically curtail trade.
Even the non-China tariff increases are historically massive and sectoral tariffs remain. More sectoral tariffs may also be announced, for example on pharmaceuticals.
Earnings Season on the Radar
There can only be one correct market view over a particular timeframe. But even if one knew it with accuracy, it does not provide a single answer for what every investor should consider.
It depends on the investors’ particular risk tolerance and level of market exposure, among other factors.
We continue to express caution about how markets and the economy will unfold. In time, investable market dislocations will be identifiable with greater confidence.
As mentioned, policy-induced market volatility remains extremely elevated as investors turn their attention to 1Q25 earnings. Several big banks and financial institutions that reported early on Friday cautioned that activity is likely to slow amid ongoing trade and economic “turbulence.”
We will continue to monitor changes in corporate guidance and noted that several consumer bellwethers including Delta Airlines and Walmart pulled guidance earlier in the week.
Citi believes that current EPS estimates (~+10% on-year) for FY2025 are improbable.
See our weekly CIO Strategy Bulletin for more details