Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
Back to square one with tariffs, US fiscal focus.
John J. Hardy
Global Head of Macro Strategy
Summary: US Treasury Secretary Bessent warned on Liberation Day tariffs returning for some and Trump’s big tax cut bill risks eroding trust in US treasuries. The USD is taking a beating again as we return to the primary concerns about the stability of US finances and the disruption from Trump tariffs.
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Latest developments:
The US dollar is suffering less from the Moody’s downgrade of US treasuries that is getting excess coverage everywhere and more because of the reasons behind the Moody’s downgrade, namely that Trump’s big tax cut and spending bill has cleared a key hurdle in a House vote yesterday and would continue to drive large US deficits if it eventually becomes law as it keeps the old tax cuts in place without reducing spending. US long treasury yields are pressuring key levels (more below).
But perhaps just as important as the above for overall sentiment was US Treasury Secretary Bessent’s appearance on a US news program yesterday in which he said that some US trading partners will see the return of the Liberation Day tariff levels if they do not negotiate “in good faith”. Bessent said “The negotiating leverage that President Trump is talking about here is if you don’t want to negotiate then it will spring back to the April 2 level.” As well, Friday saw President Trump saying that he would just come up with new tariff levels for some countries in the next few weeks because there are too many countries to negotiate deals with. Trump is also clearly furious with Walmart’s expressed intent to raise prices due to tariffs, saying that Walmart should “eat the tariffs.”
Clearly, this is a brutal rejection of the attempt by markets to come full circle from Trump’s Liberation Day tariffs in what an FT opinion piece labeled the “TACO” trade, an acronym for Trump Always Chickens Out. This doesn’t look like chickening out, so now the market is on tilt, with US equity markets and the US dollar stumbling, while Europe is steadier (the US un-exceptionalism trade).
Chart: EURUSD
Watching and waiting for whether renewed nervousness about the trajectory of US trade policy and the fiscal fragility of the US will drive the US dollar on a fresh leg lower. The clearly etched local resistance remains the former range low of 1.1266 that was tested last week. A strong close above 1.1300 or higher would more firmly establish that the EURUSD exchange rate is set to remain at the high side of the recent range at minimum, possibly ready to challenge the cycle highs and more.
Looking ahead: US Treasury yields and RBA
We’re a broken record here on the need to continue to focus on the US treasury market, and whether it is the Moody’s downgrade of US treasuries or the return of the US un-exceptionalism trade (more likely) that is driving long US yields higher, the focus intensifies as the US 30-year t-bond yield is pushing on the critical 5.0% area and the US 10-year is back above 4.50%. We’re within perhaps 25 basis points of some official response if that pressure on US treasuries continues. That “official response” has already started to appear in piecemeal fashion (the recent coverage on possible plans to ease up on leverage rules on the largest US banks and/or exempt US treasury holding by banks from leverage ratio calculations, but the crystallization of new policy clearly aimed at easing pressure on the US treasury market could provide some fresh negative pressure on the US dollar.
Late in Tuesday’s Asian session (very early European hours tomorrow at 0430 GMT) we have the RBA meeting, with a cut universally expected while the market looks for guidance on the pace of further cuts as it wonders whether the RBA is on a cut-pause-cut-pause pattern from here.
FX Board of G10 and CNH trend evolution and strength.
Note: If unfamiliar with the FX board, please see a video tutorial for understanding and using the FX Board.
The overall USD downtrend is still just barely in place, but fresh impulsive directional moves needed to drive stronger trend readings.
Table: NEW FX Board Trend Scoreboard for individual pairs. Our model had EURUSD trying to flip into a downtrend on Friday, one that would already be rejected today if EURUSD closes near current levels or higher. USDJPY needs further weakness for the trend to revert to bearish after the huge squeeze from below 140.00 to 148.50+.
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