Market Liquidity In Question

Tariffs announced by the White House last week sparked what may turn out to be a worldwide liquidity event.

Increased tariffs, something President Trump campaigned on and has been promoting since the inauguration, were announced on Wednesday of last week. In response, equities sold off more than 10% over the 2-day period on Thursday & Friday. In fact, most of the activity was led by large Hedge Funds, selling more than $40 billion worth of equities on Thursday alone. Friday saw more than 100 million in futures contracts traded - the largest single trading volume in a single day in history. As such, this feels very much like an over-reaction to public policy, but, as they say, "Don't fight the tape." Hedge Funds and institutional traders, likely due to over-leveraged positions, may be causing havoc in the markets that is not justified.

The U.S. consumer makes up 34% of global household spending, or $18.2 trillion of global consumption.

That means that Europe, China, and Japan are going to find it very difficult to replace U.S. consumers in the global market if they choose to engage in a long, drawn-out trade war. We would maintain that countries will eventually come to the negotiation table and, in fact, some already have. Japan, Taiwan, & Vietnam have already come to the table and offered to lower their tariffs on U.S. goods to 0%. Others have reportedly expressed interest in negotiating. In the meantime, the White House is expressly interested in lowering interest rates as nearly $10 trillion of US debt & treasuries are due to begin maturing in June of this year. The yield on the 10-year Treasury is down 75 basis points from the beginning of the year and if rates remain lower, each basis point in yield could potentially save the government $1 billion in interest payments.

Our view for the time being remains that an organic recession is not on the horizon.

Both the ADP Private Payrolls and Nonfarm Payrolls surprised to the upside last week. Both the Fed's National Financial Conditions Index and Financial Stress Index are firmly in negative territory, meaning financial conditions are favorable. Initial Jobless Claims came in lower than expected and both Initial & Continuing Claims remain well below recessionary levels. In addition, the Sahm Rule, published on the St. Louis Fed's website Friday, shows a decline in the likelihood of a recession, contrary to previous pre-recessionary periods. Markets are probably in for another tough day of trading.

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