That’s how we might sum up the current sequence of events. Remembering that on April 2nd, Donald Trump shocked the world by unveiling universal tariffs on goods imported into the United States. Very few territories were spared, even the Heard & MacDonald Islands (although inhabited only by penguins) were punished; more fortunate Vladimir Putin's Russia was amongst the very few missing countries. It then took just a week for Donald Trump under the pressure of financial markets to declare a 3-month implementation freeze. With US long-term interest rates beginning to soar, the wake-up call had been loud. For China to benefit from a similar break, market participants had to wait until the beginning of May and an extraordinary summit between the two super-powers in Geneva. The deal resulted in a reciprocal 115% reduction in customs duties between the two countries over the next three months.
This was all it took for equity markets to almost fully recover. Volatility, which exploded in April, quickly returned to normal, but there is no guarantee that it will not spike again this summer. The risk of long-term interest rates drifting higher is also good reason to remain cautious. US equity markets so far remained unaffected by the rise in long-term interest rates, but there is no guarantee it will be the case forever, especially as high multiples and sluggish earnings growth make US equity markets look even more fragile. We are developing these ideas in this newsletter.
