‘Trump Put’ Back In Play
The rebound in risk assets in the past week, following the latest US tariff pause, supports the core economic soft-landing thesis. Under this scenario, the latest market volatility was primarily caused by trade policy uncertainty. The pause in tariffs after a market rout suggests the US administration realises the limitations of an aggressive trade policy. Standard Chartered, in its editorial, expects the US to eventually strike trade deals with major partners, and then focus on tax cuts and deregulation, helping stabilise the economy, risk assets, and the US dollar.
The selloffs in the US dollar and government bonds appear overdone. StanChart said it expects the dollar to bounce in the coming weeks, especially vs. the EUR and GBP. Also, Fed Chair Powell reiterated that rates are likely to stay on hold for now amid tariff uncertainty, supporting the USD. However, any USD rebound is likely to be limited, given signs of rotation of fund flows from the US to Europe. Hence, we would caution against taking excessive FX risks while the policy outlook remains uncertain.
The return of the ‘Trump put’. The pause in US tariffs against major trade partners, excluding China, came after a 20% peak-to-trough drop in the S&P500 index and excessive volatility in US government bond yields. This reveals the likely pain threshold of the US administration. Following the market rout, Trump’s nomination of Treasury Secretary Scott Bessent as the main trade negotiator with Japan signals a less aggressive stance on trade going forward.
Investor positioning supports near-term equity rebound. Based on the Bank’s quantitative indicators, investor positioning in US equities has fallen to its lowest level since the COVID sell off. As a contrarian indicator, this suggests a higher-than-normal probability of a recovery in the coming weeks. StanChart’s said its ‘Fear-and-Greed’ indicator remains in ‘fear’ territory after bouncing from last week’s ‘extreme fear’ levels, adding another contrarian support to a near-term rebound in equity markets. Finally, our quantitative stock vs. bond model turned mildly positive for equities again after briefly falling to negative in end-March.
Focus on corporate earnings guidance. The focus is likely to turn to the US Q1 earnings season, especially guidance on the impact of trade uncertainty on the outlook. Earnings estimates have been cut lately, with the consensus estimating an 8.6% rise in S&P500 earnings in 2025, compared with 10.5% at end-Feb, with retail, airlines and logistics industries warning about the negative impact of the tariff uncertainty on revenue. The technology and communication services sectors will be closely watched also for the impact from the emergence of China’s low-cost chatbot, DeepSeek. Nevertheless, earnings downgrade in recent months lowers the bar for companies to beat estimates.
Impact on the real economy: Besides earnings, US consumption and jobless claims data in the coming weeks will indicate whether trade uncertainty has spilled over to the real economy. US retail sales in March was stronger than expected as consumers rushed to beat higher prices from coming tariffs. US auto sales in March surged to the highest level since the peak of post-COVID dash for cars in 2021. However, future sales are likely to be hit as the front-running of tariffs fades.
Staying diversified, looking for bargains. As a semblance of normality returns to markets, we continue to look for bargains, while ensuring allocations remain diversified across asset classes and geographies. We would use the recent selloff in US government bonds to add to this historically defensive asset class. The bank sees the US 10-year government bond yield falling towards the 4.0-4.25% range in the next 12 months. The latest rebound in yields, which has brought them back to end-March levels, was mainly driven by technical factors which are likely to fade as authorities take steps to boost market liquidity.
Buy any dip in gold. Gold, the best performing major asset class this year and in the past two years, appears overbought, with stretched investor positioning. This raises the risk of a near-term correction. Investors under-allocated to gold could consider such a correction as an opportunity to add exposure, given sustained demand from Emerging Market central banks and gold’s track-record as a hedge against stagflation risks.
