Global equities plummet

Major stock indices plunged on Monday as US President Donald Trump showed no sign of backing away from his sweeping tariff plans, and investors bet the mounting risk of recession could see the Federal Reserve cutting interest rates as early as May.

Futures markets moved swiftly to price in almost five quarter-point cuts in US rates this year, pulling treasury yields down sharply and hampering the dollar on safe havens.

The carnage came as Trump told reporters that investors would have to take their “medicine” and he would not do a deal with China until the US trade deficit was sorted out.

“We’re in the territory where this will be a named event when people write about things in 10 or 20 years time,” said Tim Graf, head of macro strategy for Europe, Middle East and Africa at State Street, adding that last week’s sell-off was being worsened by two things.

“Things become reflexive — derisking leads to derisking — and even though individual actors in markets think they are doing the rational thing, when they all do the same thing at the same time, it becomes irrational on the surface, a sort of tragedy of the commons.”

“And secondly there is an intransigence element that will come to the fore because these guys [US policymakers] don’t sound like they are going to change their minds.”

Investors had thought the loss of trillions of dollars in wealth and the likely body blow to the economy would make Trump reconsider his plans.

“The size and disruptive impact of US trade policies, if sustained, would be sufficient to tip a still healthy US and global expansion into recession,” said Bruce Kasman, head of economics at JPMorgan, putting the risk of a downturn at 60%.

S&P 500 futures slid 2.2% in volatile trade, while Nasdaq futures dropped 2.4%, both down less than they had been in early Asia trade but set to add to last week’s almost $6-trillion in market losses.

The pain likewise engulfed Europe, with the broad Stoxx 600 down 4%, with recent market darlings particularly hurt as investors were forced to sell what they owned.

Defence stocks tumbled 4.3%, while banks shed 5% on the day and are down more than 20% from their recent closing high, on course to confirm they are in a bear market.

In Asia, the Hong Kong Hang Seng’s 13% one-day slump was the largest since 1997, while in mainland China the blue-chip CSI 300 index was down 7% only finding a floor when state media reported China’s sovereign fund Central Huijin was a buyer.

The gloomier outlook for global growth kept oil prices under heavy pressure, following steep losses last week.

Brent fell $2.30 to $63.30 a barrel, while US crude lost $2.20 to $59.81 a barrel.

Never mind inflation

Growth fears caused Fed fund futures to price in an extra quarter-point rate cut from the Federal Reserve this year, and markets swung to imply around a 54% chance the Fed could cut interest rates as soon as May, even though chair Jerome Powell on Friday said the central bank was in no hurry.

That gave a boost to treasuries in early trade and the 10-year yield neared Friday’s six-month low of 3.86%, though the move failed to hold and the benchmark was last flat on the day at 3.992%.

The rebound brought the dollar off its early lows against safe-haven currencies, but it was still down 0.4% on the Japanese yen at ¥146.2, and 0.8% % on the Swiss franc at Sf0.8533.

The euro was steady at $1.1005, seemingly benefiting from some nervousness about the dollar, though the trade-exposed Australian dollar dropped a further 0.5%.

Investors were also betting that the imminent threat of recession would outweigh the likely upward shove to inflation from tariffs.

US consumer price figures out later this week are expected to show another rise of 0.3% for March, but analysts assume it is just a matter of time before tariffs push prices sharply higher, for everything from food to cars.

Rising costs will also put pressure on company profit margins, just as the earnings season gets under way with some of the big banks due on Friday. About 87% of US companies will report between April 11 and May 9.

Analysts at Goldman Sachs said in a note they expected fewer companies than usual to offer guidance about their results for the second quarter or the year as a whole.

As well as inflation data, investors will be watching scheduled US government bond auctions. A poor outcome “will be jumped on by investors” and would be negative for the dollar, said ING.

Even gold was swept up in the sell-off, easing 0.3% to $3,026/oz.

The drop left dealers wondering if investors were taking profits where they could cover losses and margin calls on other assets, in what could turn into a self-feeding fire sale.

Reuters