Tatton News Archive

Latest news from Tatton Investment Management: Market update, or staying calm in a crisis

8 April 2025, 05:00pm

Equity, currency and bond markets have been in turmoil since the start of April, following Donald Trump’s escalation of tariffs on all US trading partners.

The new US tariffs vastly exceeded market expectation at an average 20-25%, far higher than the 4.6% trade-weighted tariffs of the rest of the world on US exports. For context, in 2023 US tariffs were around 2.2% on imports. As we know, the one thing markets have a really adverse reaction to are negative surprises.

After, what we described last Thursday as a ‘measured’ further downward move by US stocks, by Friday and Monday wider risk markets were impacted, with dramatic moves lower. Beyond equities, sub-investment-grade corporate bonds and loans came under pressure despite government bond prices rising. Meanwhile emerging market and commodity-related currencies were weaker; the Australian Dollar fell 4% against Sterling during Monday’s session.

Markets displayed a transition on Friday, going from a fairly normal balance of buying and selling, to an imbalanced ‘capitulation’. This refers to a ‘liquidity squeeze’, caused by forced sellers flooding trading desks, turning rational market behaviour into a panic.

Forced sellers come from the speculative end of capital markets, where assets are often bought for short term gain with borrowed money, a trade form that requires dynamic increases of the ‘deposit’ when the pledged asset for the loan falls in value – this requirement for further cash is known as margin calls. Markets quickly moving against them can create extreme volume mismatches between sellers and buyers, which, because trades have to clear eventually, drives down prices far more rapidly than any rational investor might expect. The defining characteristic of ‘capitulation’ is the ripple effect to other asset classes which are normally negatively correlated to equities. This is what happened on Friday and Monday morning, when gold and government bonds also fell.

More drama tomorrow
This week has another drama scheduled for Wednesday, 9th April, when the additional tariffs come into effect, an extremely short timeframe for affected economies to respond or negotiate. Many countries are attempting to be conciliatory; Vietnam even said it would remove all tariffs.

However, Peter Navarro, Trump’s trade and economic adviser, said today that even this would not be enough, suggesting there is unlikely to be anything that the targeted countries can reasonably do in the near-term to avoid their tariffs.

What is left is some retaliation now, and a hope to negotiate later. China will impose levies on all US goods of 34% starting April 10, matching Trump’s ‘reciprocal’ tariffs on Chinese products, and other measures including an immediate restriction on exports of seven types of rare earths. Trump has immediately threatened another 50% on top – raising the tariff to 104% - deriding Beijing’s response as the “wrong” move.

China was quick to announce they would match the US threats to the bitter end. Meanwhile Europe is currently coordinating its response which may extend the scope of trade barriers to IT services, should it be decided that there is not enough ‘deal’ progress with the Trump administration over the coming days.

Investors are already unnerved by a high degree of uncertainty that is still rising rather than falling. Trump may be seeking deals rather than justifying very high tariff levels, but even this poses a problem for investors. A tactic of continual negotiation deadlines, combined with a “hardball” approach to each deadline, ensures that risk is always elevated. Yesterday markets suddenly bounced back on a ‘90-day suspension of tariffs’ rumour only to fall again when it proved untrue. Markets are in a high state of flux and any strong positioning one way or the other can create long term unintended consequences for investors.

Where might the markets find some good news?
The surprisingly harsh trade tariff announcements caused investors and analysts to revise economic growth and corporate profit forecasts. JP Morgan now expects US growth will contract by -0.3% year-on-year (when comparing 2025 Q4 to 2024 Q4). Canada will be hardest hit, probably contracting by -0.8%. Goldman Sachs’ and Morgan Stanley’s recent forecasts revisions have been in the same direction.

Having been more optimistic earlier in the year, investors now appear to be more pessimistic than economists. Hardly surprising since recent events have had consistently negative outcomes, and it’s difficult to think that this process may turn around. Fears of a hard global recession are now dominating the financial media. Global equity markets have fallen around 15% since their February peak, with larger losses in the US having eroded some of the share valuation premium of recent years on the back of consistently stronger corporate profitability than elsewhere.

However, on the flipside, Trump’s actions are also causing a greater likelihood of positive policy interventions and other recent economic headwinds receding.

Because of likely support measures, both fiscal and monetary, both China and Europe (including the UK) may escape recession, although China’s growth is likely to be substantially weaker than their 5% target.

While the Trump tariff policy puts the US central bank, the Fed in a difficult position, it is highly likely that it will opt to cut rates if markets become much more stressed. Other central banks are in a similar position and are likely to cut sooner and more aggressively than thought in March. Different to the past decade, they currently have considerable ‘dry powder’ of interest rate cuts to deploy, given the still elevated level of interest rates, that the previous market scare of the post-pandemic inflation surge caused.

And, while Trump is not responding to foreign pressure, domestic pressures are growing. Many Trump voters and supporters may not be happy with the prospective outcome of both inflation and recession, while the values of their stocks and cryptocurrencies fall. Joe Rogan, the podcaster that gave Trump a big boost in his election campaign, has railed against the tariff imposition. Currently, a number of Republican Senators are backing a bill which would deem the tariff impositions to be unconstitutional. Even Elon Musk is joining the fray, criticising Peter Navarro, and saying that tariffs should be about making deals and promoting free trade.

At such points, when overall policy moves are more likely to try to stabilise the situation, when sentiment has become so bearish and trading volumes so low, the markets are vulnerable to both sharp gains as well as losses. US stocks rose 9% from Monday’s lows, as markets again pointed up during the start of Tuesday’s trading.

In the bull-market lead up to the recent turmoil, we positioned investors’ portfolios cautiously with an overweight to bonds and an underweight to US equities, partly because the consensus appeared overly optimistic. We remain cautious following the surprising and unhelpful policies of the US administration. Nevertheless, it is a growing positive that other investors have become much more pessimistic.

In last Friday’s edition of the Tatton Weekly we wrote:

Only after the fact can we know when markets’ turning point was. After this week’s apparent capitulation, we sense we are close, but we should not be surprised to see some more volatility ahead. Neither should we be surprised to see a recovery sooner rather than later. Once the dust settles and new policy direction becomes clearer, changes to medium-term trends will emerge. That will be the time to reposition investment portfolios and decide whether beyond our tactical underweights of the moment there are long-term opportunities to change regional asset allocations.

This Monday may, or may not, have marked the turning point of this latest market upheaval, (upheavals that longer term investors have by now become sadly accustomed to). What we wrote last Friday still very much stands, even though our ongoing assessment adapts to the ever-changing outlook. As we have done over past crises, our objective is to apply calm judgement in steering Tatton’s investment portfolios. Our range of Overlay funds enables us to adjust portfolio allocations when speed of execution is of the essence. Yesterday’s rebalance back to our neutral target weights being a good example.

Note:
Interestingly, the last time we experienced this state of market action was 5 years ago in the run-up to the shutdowns of the COVID19 pandemic. While the nature of the uncertainty then was clearly different, investor behaviour followed a similar pattern, which is why we have updated a note we wrote back then that Tatton clients found useful and have attached to this email.