Oh, what a lovely (trade) war.

As the rhetoric between China, the U.S. and the major trading partners of the U.S. escalates, markets have woken to concerns about growth and global growth. Whilst equity markets rallied, and commodity markets performed, Trump could do no wrong. Perhaps that view is now changing. Markets have become more challenging and uncertainty bites at every corner.

In May, stock traders ought to have stayed away. The S&P 500 had the worst month since the 60’s falling 6.6% as the trade spat escalated. This is only likely to worsen as Trump is now threatening Mexico with tariffs if they cannot stop the humanity that is seeking the U.S. as their next refuge.

Markets want clarity, they don’t mind eccentricity, but all they are getting is confusion. Of the 11 major sectors on the S&P 500, 10 were negative, real estate was positive and that was due to lower rates. Companies that had major export or imports with China were trashed. The Philadelphia Semi-Conductor Index was down 17% for the month.

The transport sector is especially affected. Fedex is under possible siege in China and the transport index is falling as demand falls.

Bonds rallied and the 10-year treasury rallied 37bp over the month. That rally was due mostly to the changing fortune of economic growth and the belief that corporate earnings were at risk. Those with a healthy risk appetite became risk averse.

The rally on Friday was in response to Trump’s call to impose 5% tariffs on Mexican goods. The inversion between 3-month bills and 10-year treasuries widened to negative 24bp and this is causing some analysts to believe that a recession is highly likely in one or two years. There is now a 40% chance of a cut by the Fed in July and a cut by December 2019 is seen at 90%.

The Rant.

Tariffs or rather the threat of tariffs are not only impinging on world growth but also consumer confidence. Despite economic evidence on Friday that the U.S. economy is in ok shape, the home markets are now fully expecting a slowdown.  Counterparties are starting to counter Trump’s measures.  China for example is believed to be about to restrict exports of rare earths.

Treasuries have benefitted as a return to risk off evolves and this is great for funding the budget deficit on both the issuance and the interest necessary to pay investors to buy the debt. The borrowing costs are collapsing amid record issuance.

Now people are talking trade war, and trade is something that once broken takes a long time to negotiate new agreements. The U.S. has in some way deliberately broken the wheel and without allies, is on its own. If the U.S. wanted to break China, it needs support and by antagonising its major allies, support for Trump’s U.S. is rapidly waning.

Meanwhile, Brexit adds to the confusion. Trump has thrown his support behind Boris Johnson who over the past year or so has been rather complimentary towards Trump. Boris, unfortunately, is running on the platform of ‘I have no idea what to do but I want to exit Brexit without a plan.’ As a disruptor, Boris will find it difficult to achieve anything other than a mess by exiting the EU without a plan or a strategy.

The EU has already told the UK that they will not negotiate any more. The UK does feed a significant amount of money to the EU, however they do need the EU for trade. Even simple things like lettuce and tomatoes would suddenly become very expensive under Johnson’s plan. Deutsche Bank by all account is now moving its swaps team from London.

Meanwhile, corn seems to be remaining a major problem.  Soggy fields, tariff issues and the threat of more rain is hampering planting. Now there is also the issue of Trump and Mexico. Last year Mexico bought $5.5bio of U.S. grain and soy last year. New tariffs could kill that new market for U.S. farmers.

Farmers are also complaining about the weather being unlike any weather they have experienced. With records indicating that this is the wettest April on record. Some 6 million acres will be unsown this year. For poultry farmers and beef producers, this is not good news as the cost of feed is ratcheting higher.

Market Recap.

Equities: The S&P 500 fell 1.32%. The Dow fell 1.41%.  The Vix closed at 18.71. The Stoxx Europe 600 Index fell 0.8%.

Currencies: The Bloomberg Dollar Index was flat. The euro rose 0.4% and yen fell 1.1%.

Bonds: (as at 4.30pm). The ten-year is trading at 2.133%. The 2-year is trading at 1.924% and the 30-year is at 2.571%. The U.S. curve closed on the day with the following closes 2/10 at 20.7 bp, 2/30 at 64.6 bp and the 10/30 closed at 43.7 bp. The U.S. 5-year closed at 1.916%. The 2/5 spread is now -1 bp. The ten-year bund closed at -0.201% and the British gilt closed at 0.894%. The 10-year yen gilt is trading -0.096%.

Commodities: WTI fell 5.9%. Gold gained 1.3%.

Bitcoin is trading around $8,701.

Aussie Market Today.

Equities are expected to sell today as markets were soft on Friday. A change in sentiment will require an announcement of some form, so that’s the risk. That’s possible, later this week as the Mexican President and Trade Minister meet with Trump this Wednesday.

Bonds look bid on the day. With the movements offshore, bonds look likely to rally 5-7 bp. Credit looks to be wider on the day as it widened Friday in response to weaker equity markets. Expect further widening on the day.

Geopolitical risks remain high and still need to be monitored.