MARKET COMPASS
Trade War Begins
Global markets are leaving behind a dizzying week. The trade wars sparked by Trump have forced investors to watch historic pricing that has rarely been seen before. Wall Street struggled to price in a climate of very high tariffs on selected countries, followed by a 90-day postponement of these tariffs, and then a reduction of the issue to a US-China spat. We saw very sharp rises and falls, and the repercussions were felt across all financial instruments.
With Trump’s unpredictable behavior and decisions, it is hard to say where the issue will evolve. In the current picture, it does not seem like China will give in. But even if we try to predict what we will witness in the coming days and weeks, we can say that both Trump’s and China’s behavior change the variables of the equation very often, and in such an uncertain environment, forecasting models may be useless. We can only say that we remain convinced that Trump intends to use the tariff weapon as a tool before coming to the table to negotiate.
Over the weekend and into next week, news on customs data will continue to drive prices. In addition, there will be a few developments on our radar where we may get clues about the future stance of the US Federal Reserve (FED), which is closely related to the dose of global financial tightness. Let us remind you that the bond market in the US will work for half a day on Giovedì, while all US markets will be closed on Venerdì for “Good Venerdì”. On Mercoledì, the US retail sales data for Marzo and FED Chair Powell’s speech will be under our close scrutiny.
FED Chair Powell’s Speech
We are living through a period of unusual pricing. In addition to the sharp falls and rises in Wall Street indices, we are also observing interesting changes in the bond-bill market. Assets that are considered to be relatively safer in order to escape the negative impact of trade wars, apart from the short-term but harsh impact of the 90-day postponement decision, increased demand gained value. However, there is one point that stands out and that is the US bond pricing.
The yield on the US 10-year note fell as low as 3.86% during the week on the back of increased demand, but rates started to rise on Aprile 7 as markets continued to be risk averse. Yields climbed as high as 4.51% as investors sold US assets as risky. Meanwhile, during the week, we also witnessed a profound shift in expectations for the US Federal Reserve’s (FED) decisions coming out of the Federal Open Market Committee (FOMC) meetings in Maggio and Giugno.
Against this backdrop, FED Chairman Powell is expected to deliver a speech at the Economic Club of Chicago on Mercoledì. We will be watching closely what he has to say, especially on the potential economic damage from tariffs and inflation. According to CME Group’s FedWatch Tool, at the time of writing, the Fed is not expected to make a rate change at its Maggio 7 meeting. However, a 25 basis point rate cut at the Giugno 17-18 meeting is priced around 62%.
The chairman’s comments that may cause these expectations to change may lead to harsh pricing. If we look at the speeches of the last FOMC members, we can expect Powell to emphasize that the effects of changes in tariffs may be harsher than expected. However, it needs to be filtered whether he sees this as a bigger problem for economic growth or inflation. If the President emphasizes the need for a rate cut, this could provide some breathing space for the markets and have a positive impact on digital assets. If he emphasizes the continuation of the wait-and-see strategy, the markets’ expectations for a rate cut may be postponed, which may bring sales to risky instruments, including digital assets.
US Retail Sales Data: It is an important measure of consumer spending, which accounts for a large part of overall economic activity. It shows the change in the total value of retail-level sales and is published monthly, about 16 days after the end of the month. A separate measure of the change in the total value of retail-level sales excluding automobiles is called core retail sales. The retail sales data set is generally expected to have a positive impact on digital assets if it is below expectations.
Digital Compass
We consider it a very important development that a strategic crypto reserve is on the agenda in the US, the locomotive of the world economy. However, the fact that the markets had already priced in the “best case scenario” before and after the US elections, combined with the “less than perfect” news on this issue, put pressure on digital assets. We continue to keep the strategic reserve issue in our equation as a positive variable for cryptocurrencies in the long run. On the other hand, we think that we may continue to see pressure in the medium term with the lack of new news flow that will create enthusiasm in the crypto market and further concerns in global markets that global economic activity may slow down, especially with Trump’s tariffs. In the short term, markets will continue to be sensitive to macro indicators and developments regarding tariffs.
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