There's no sign that markets have had enough yet

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Today's Points:

Global markets really hated the Liberation Day tariffs. The selloff intensified at the Asia opening: Chinese yuan weakens, US stock futures point to a further 5% decline. Jerome Powell and Donald Trump are playing chicken over rate cuts — don't expect a Fed Put until things get much worse. The US administration is digging in to say tariffs will start on schedule, while "about 50" countries want to negotiate. The problem for countries like Vietnam, facing a 45% tariff, is that their own tariff on US goods is 5% and eliminating it does little for the US. AND: For even more wrenching drama, watch Adolescence.

What Just Happened?

Global markets underwent a seismic response to last Wednesday's announcement of sweeping tariffs by the US. As we brace for inevitable aftershocks in the days ahead — and with Hong Kong stocks down 10% at the time of writing in New York — here are the main details of the earthquake to date, in chart form. First, the fact that the selloff on Friday was as severe as Thursday's is unusual. It showed little interest in rethinking. It was the only third time this decade that the S&P 500 shed more than 10% in two days. These are the index's 10 greatest two-day selloffs in this century. Liberation Day falls behind only the worst moments of the Global Financial Crisis and the Covid lockdowns: The brunt was born by the biggest tech groups, which were worth the most in the first place. That led to spectacular losses in terms of market cap. Apple Inc., particularly exposed to transpacific commerce given its operations in China, was worth almost $4 trillion at the height of the "Trump Trade" over the Christmas break. It's now worth less than $3 trillion. All of last year's gains have been canceled out: If the 4.8% fall in S&P 500 futures at the Asian opening isn't reversed, then it's on course for its worst three-day selloff since the Black Monday crash of October 1987. But it's important not to overstate this. The market has swung away from a position that looked extreme. A 60/40 index (the classic 60% equities 40% bonds allocation) is the lowest in six months, but no worse than that. Similarly, stocks relative to bonds, as proxied by the popular SPY and TLT exchange-traded funds, have lost a lot of ground, but have held on to most of their post-pandemic gains. Retirement funds haven't been wiped out. Keep this in proportion; while remembering that there's also plenty of room below for this to go much further: Stock investors are convinced so far that this will damage the US more than the rest of the world. Emerging markets, recipients of some of the most extreme tariffs, have been comparatively unscathed since last Wednesday: In credit, spreads have widened sharply, suggesting a revival in recession risk. Again, emerging markets, which had been on a bad run, do not seem that badly affected to date. The rise in US high-yield spreads leaves risk far below the levels topped in 2022, but it's plainly very significant: The risk of an imminent financial accident may reside chiefly in credit. Companies are highly levered and have been surviving on generous rates they negotiated in the zero-rates environment of 2021. Any dislocation now raises serious risks. The most important issue concerns the dollar. It has been taken as a given over the last few months that US tariffs would mean a stronger dollar. Markets attempt to counteract the impact of the levies, as tariffs should mean higher inflation which would mean higher rates. Whenever risk spikes, investors take refuge in the US, even if it's the epicenter of the problem. But not this time. The dollar tanked on Thursday, even as money poured into Treasuries. Friday (when there were some big US macro developments that we deal with below) saw the dollar recover a bit, while Treasury yields rose — but this is a very important development to monitor. To give a sense of how unusual Thursday was, this chart from Exante Research maps the dollar's performance against moves in the S&P 500 over the last seven years. Thursday is marked in yellow — it was a very big outlier. If that's because confidence in the US and its assets is truly shaking, that is a very big deal: Is it fair to call this a catharsis, or revulsion trade? It doesn't look like that yet. Plenty of people tried to pick the bottom as the market fell on Friday, with big net purchases of ETFs tracking the S&P 500 and Nasdaq 100. Sentiment hasn't been wiped out: That said, volatility — as defined by the CBOE VIX index derived from options prices — has at last spiked to its highest since the worst of the Covid lockdowns. It had stayed calm for months, and this is a clear sign that investors really didn't think that Trump would go this far on tariffs: As for valuations, they've come down a lot, but remain just above their lows for the last decade. If this is a true paradigm shift, there could be much further to go — particularly if the forward earnings estimates that these valuations are based on have to be cut to account for tariffs. But so far, this selloff presents more as a classic correction of an overvalued market: Another critical development came in the oil market, fueled by a combination of growing recession fears and the decision by the OPEC+ cartel to increase supply. In early Asian trading, West Texas Intermediate crude dropped below $60 per barrel for the first time in four years. This is good news for an administration trying to show that it can contain inflation: Cheaper oil does, however, stand in the way of boosting production in the US, as it's hard to justify drilling at these low prices. Shares in drilling companies and exploration groups suffered the worst post-Liberation Day selloff:  The strongest chink of light last week came from the performance of frontier stock markets, which do not yet qualify to be classified as emerging. Since the Trump Trade peaked over the Christmas period, the MSCI Frontier index has beaten its World index of developed world stocks by 20%: Since Wednesday's announcement, Bloomberg lists nine stock markets around the world that have gained, led by Ghana and Pakistan. There may well be aftershocks ahead, but for now the frontier market-shave skirted the worst damage from the attack on globalization.

First, Not The Last

Long before Trump's tariff tsunami, US consumer confidence was tanking frenetically, and there's no sign of that changing. This Apollo Global Management chart highlights how badly consumer sentiment is across the board: But while "soft" data like this is terrifying, hard macro data, which generally come with considerable lags, are emitting stronger signals. In what would in normal circumstances have prompted a big market reaction, March's nonfarm payrolls rebounded far ahead of expectation Friday. The unemployment rate has ticked up, but the labor market was still in nothing like recessionary health heading in to Liberation Day: Back in September, fears of a weakening labor market sparked a jumbo cut of 50 basis points in the fed funds rate. On the face of it, the unemployment data make it much harder to justify further interest rate cuts, although the consumer price index this Thursday will be another crucial point to gather whether inflationary pressures have truly taken off. If the median estimate of economists surveyed by Bloomberg is correct, March's core inflation will pick up pace at 0.3% from 0.2% the month prior, which would make it far harder for the Fed to cut rates — although it's also difficult to tell whether any rise in prices at this point has been caused by tariff fears leading to panic buys.  This was the backdrop when Fed Chair Jerome Powell gave a previously scheduled speech Friday morning. He took the opportunity to sound hawkish: While uncertainty remains elevated, it is now becoming clear that the tariff increases will be significantly larger than expected… The same is likely to be true of the economic effects, which will include higher inflation and slower growth. Powell added that he didn't see any hurry to cut rates. All of this sounds like a drastic hawkish volte-face after his comments a few weeks ago that the effects of tariffs on inflation would be transitory. They made the calculus for the rates market much harder. This is how the implicit rate for the end of this year has moved since the tariff announcement. Once China retaliated, traders were prepared to price in an extra two cuts for this year. The employment data and the Powellspeak forced a rethink, but only a partial one: Powell described strong goods-inflation readings as "very unexpected," so core goods — which should bear the brunt of tariffs — could be critical to watch. Oxford Economics' Bernard Yaros and Grace Zwemmer predict a surge to 4.5% by year-close amid a slowdown in growth to about 1.3%, less than their previous 2% forecast: With a heavy focus on Asia, the biggest impacts will be felt across a range of electronic products and home goods, including furniture and household appliances. Consumer prices for some goods could rise as much as 10%, likely driving some substitution to services. The economic hit from reciprocal tariffs raises the odds that Republican lawmakers will go bigger on tax cuts, but such additional fiscal support is unlikely to offset the drag from tariffs.  Despite this, the president urged Powell on Truth Social to cut rates: This would be a PERFECT time for Fed Chairman Jerome Powell to cut Interest Rates. He is always 'late,' but he could now change his image, and quickly. Energy prices are down, Interest Rates are down, Inflation is down, even Eggs are down 69%, and Jobs are UP, all within two months — A BIG WIN for America. CUT INTEREST RATES, JEROME, AND STOP PLAYING POLITICS! Fed funds futures suggest the market expects Powell to cave. But it's difficult for that to happen. "Unless the functioning of financial markets, such as the flow of credit, begins to seize up, there isn't much the Fed can do," says Bankrate's Greg McBride. "An emergency rate cut would do little and could fuel further panic. Any boost to sentiment could also be fleeting amid such uncertainty." Unlimited's Bob Elliot argues that the range of possible outcomes on inflation is pretty narrow relative to the range on growth: Part of what you're seeing in the market action is a confirmation of that dynamic that bond yields are falling at a time when stocks are falling, which highlights that growth volatility is the primary driver of the current dynamics. If that's the case, the Fed might have to prioritize growth, and cut. But Bloomberg Economics' Anna Wong and her fellow analysts argue that Fed will likely prioritize its price-stability mandate over its full-employment goal. The fastest route to an emergency cut in the coming days would come via an incident that posed a major threat to market stability. Nobody wants that. —Richard Abbey

Survival Tips

Some recently viral videos. First, this video of Ronald Reagan making the case against protectionism, recorded in 1987, is extraordinary. It's easy to forget what a great communicator he was, and that change happens in US politics within parties rather than between them. Somehow, four decades took the Republican Party from Reagan at Camp David to Donald Trump in the Rose Garden. Second, the family took the opportunity this weekend to catch up with Netflix's massive hit Adolescence. In my opinion, you should believe the hype; it's brilliantly shot, and wonderfully acted; although my teenage son insists that its depiction of incel culture and misogyny is wildly exaggerated. I hope he's right about that, but it's an engrossing drama that prompted an important conversation. Recommended. Hold on to your hats and enjoy the week, everyone. More From Bloomberg Opinion: David Fickling: China Has Already Trade-War-Proofed Its Economy Jonathan Levin: America's Retirees Will Share Wall Street's Pain Matthew Yglesias: Tariffs Won't Bring Back Union Jobs in Auto Factories

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