Teaching from Truell
The view of Edmund Truell at 8.43 yesterday evening, an evening the other side of Donald Trump’s withdrawal from more aggressive tariffs to most and an example setting tariff for China. Here is the circular shared on Linked in.
Another £100+billion hit to UK pension funds. As I said yesterday morning on the BBC rather too politely “ a misplaced view of risk “ by persisting with LDI-lite and anything-but-safe bond assets...[hedging counterparties] are calling in margin and so pension funds and insurers are selling their gilt holdings. This has started the ramp in the 10 year from 4.446% Friday to c.4.75% today. And the 30 year from 5.11% Friday to a 27-year peak of 5.6% today.As for Corporate bonds, the mark-to-market down 20%+ will cause further carnage.
The view of the FT’s US Financial Control is less pension-centric but equally clear that it is bonds that matter most and that recoveries in equities are a matter of opinion
Good morning. The Nasdaq rose 12 per cent yesterday — its biggest rise since 2001 — and the S&P 500 jumped by 9.5 per cent. Why, then, don’t we feel much better?
Now we know Donald Trump’s pain threshold: 12 per cent down on the S&P 500, followed by a 60-basis point jump in the 10-year Treasury.
Trump withdrew the craziest of his “reciprocal” tariffs before the liberation day sell-off could even wipe out a year’s stock market gains, and before the Fed even had to face hard questions about intervening in the Treasury market. Trump was not prepared to take markets all the way to the edge.
Investors were right to celebrate. Not because the remaining 10 per cent universal tariff and a full-on trade war with China will do no damage to corporate earnings or economic growth. It will take a while to recalibrate how bad the harm will be. But we now know the market has Trump on a leash, and we have an initial estimate of its length. Whether “this was the plan all along” is an academic question. Whatever the plan may have been, its extent and its timing were ultimately determined by the movement of capital. Good.
Amid the relief, a couple of dour points to bear in mind:
- The existence of a market guardrail trims the range of possible outcomes, but uncertainty is still high. In particular, the tariffs that remain are plenty high enough to have inflationary implications, a risk the market does not seem to be taking particularly seriously right now (as we wrote yesterday).
- The valuations of all risk assets, but especially large-cap US stocks, are right back to uncomfortable highs. It won’t take much to kill yesterday’s burst of upward momentum, which already looks like an overshoot.
- The bond market, unlike the stock market, has not retraced its losses. Zoom out to a five-day chart and yesterday afternoon’s relief rally is hardly even visible (see next piece). This is probably a better gauge of the balance of risks than equity prices.
Risk is meaningfully lower today. It is not low.
Excuse me for not trying to make sense of this.I am recovering from a recent operation , the results of which are doing my head and body in, rather like Mr Trump is doing the markets!
This comment on Truell’s linked in comment (see the top of this blog) is pretty much in line with mine.
