The Overnight Report: Tech Trips, Gold Rips

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US markets moved into risk-off mode as growth and inflationary concerns resulted in investors flocking to gold, pushing the price to another record high. ASX200 futures are weaker, down -26 points on a shortened week.

Good Morning,

US markets were looking for an excuse to sell, and ongoing tariff concerns, chip stocks and Fed Chair Powell gave sellers an excuse to send markets lower. Gold rallied over 3% to a new record high.

What happened overnight: Extract NAB Markets Today

The S&P500 was tracking down a little over -1% during the morning session, before taking another leg lower as Powell remained clear that the FOMC could not move quickly given the tension between the two sides of their mandate. 

There was some retracement late in the session but the S&P500 still closed down -2.2%.

Semiconductor companies underperformed with AMD, down -7.4% and Nvidia, down -6.9%, after the Trump administration curbed the export of their chips to China and ASML earnings disappointed.

That was despite more upbeat US data. Retail sales jumped 1.4% in March, as expected. More than two-thirds of that was a 5.3% jump in auto purchases, pointing to some pull forward to get ahead of tariffs. 

Consumption growth has slowed sharply from its breakneck pace at the end of last year, but fears discretionary spending was already collapsing even before the April escalation in tariffs and uncertainty look to have been overegged. 

Industrial Production was down -0.3% in March, near consensus for -0.2%. The Atlanta Fed’s GDPNow tracker revised up its consumption tracking estimate to 1.4% from 0.7%, and its total growth forecast (adjusted for gold imports) sits at -0.1%.

Powell emphasised the textbook playbook for a dual mandate central bank. He said, “our obligation is to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem.” He said markets were functioning ‘and orderly’, that “we are well positioned to wait for greater clarity before considering any adjustments to our policy stance.” 

While the remarks knocked sentiment in equity markets, US 2-year yields more than retraced a short-lived bounce higher and are -7bps lower over the day to 3.77%.

In tariff news, Trump said he would join trade talks with a Japanese delegation. China appointed a new top negotiator for if and when negotiations happen and Bloomberg reports that China wants to see a number of steps before agreeing to talks, including a more consistent US position, a willingness to address China’s concerns around American sanctions and Taiwan, and more respect by reining in disparaging remarks by members of his cabinet. California Governor Gavin Newsom said the state will sue to halt sweeping tariffs.

UK CPI inflation data was a tenth below expectations at 2.6% y/y. A May cut is now full priced, and there are -80bps of cuts priced by the end of the year, up 7bp from the prior day.

Yesterday, China activity data were stronger than expected, with GDP for Q1 up 5.4% year-on-year and industrial production and retail sales accelerating in March to 7.7% and 5.9%, respectively..

The Bank of Canada held rates as widely expected. More interesting was the decision not to provide forecasts, but instead publish two “illustrative” scenarios depending on the extent of tariffs. 

US Indices Performance year-to-date:

-Dow Jones Industrial Average: -6.8% 
-S&P500: -10.3%
-S&P Midcap400: -12.8%
-Nasdaq Composite: -15.6%
-Russell2000: -16.4%

Extract from Steve Sosnick, Interactive Brokers on Tariffs: The Cavalry is Not Riding to the Rescue

One of the most frequent questions I’ve been asked recently is whether there is a precedent for what we’re seeing in the market right now.  

The short answer is “history doesn’t repeat itself, but it often rhymes.”  Unfortunately, that leads us to the most dangerous phrase in investing, “this time it’s different.”  

There are elements of the current market environment that are reminiscent of the 2020’s covid crisis, but the likely policy responses differ substantially.

The similarities are straightforward.  In springtime (US), an exogenous event hit a market that had been trading near all-time highs.  

The ensuing reaction had wide-ranging consequences beyond just a significant, rapid selloff in stocks.  It was clear that the covid-related shutdowns were going to have an immediate, unpredictable negative effect on the economy, and markets certainly fear that something similar could result from the tariff announcements.

Yet that is where the most obvious similarities end.  

For starters, the tariff reaction is self-inflicted.  

The covid virus came from abroad; the tariff policies arose from a duly elected domestic administration.  Defending against an unfamiliar virus brought a set of challenges that defied an immediate solution, but the actions that created the current angst could be unwound with the stroke of a pen, even though there is currently a clear unwillingness to do so.

The clearest difference, and the one with the most immediate consequence for investor decision-making, rests in the likely policy responses.  

The world’s central banks, most notably the Federal Reserve, unleashed a series of unprecedented monetary accommodation.  The Fed Funds target was quickly slashed to 0% from 1.75%, alongside a wave of quantitative easing.  

At the same time, many governments around the world unleashed waves of fiscal stimulus.  

Millions of people who had previously shown little interest in markets found themselves with time on their hands and excess liquidity, much of which found its way into investment accounts. 

It is nearly impossible to expect either of those types of responses this time.  For starters, fiscal stimulus is all but out of the question.  

The Trump administration has prioritised shrinking the size of the Federal government.  It is essentially impossible to expect them to reverse course on that front.

On the monetary front, remember that the immediate effect of the Covid shutdown was deflationary.  Demand for services and many goods evaporated overnight.  That gave central banks the ability to add liquidity with impunity, especially because inflation was already well-contained (the CPI was averaging 2% gains pre-covid).  

Now we have policies that are almost certain to raise prices for end-consumers at a time when inflation is already above the Fed’s target.  

It is difficult to expect that the Fed will have any impetus to cut rates or markedly increase the size of its balance sheet unless circumstances become truly dire. 

The “Fed Put” might still exist, but it won’t be exercised unless the broad economy or the banking system requires it. What we wrote in May 2022, when some investors were hoping that the Fed would rescue a falling stock market, still holds:

Here’s the real thing. The Fed has never stated that they will intervene in equity markets just because they are down.  But they will almost certainly intervene if there is a crisis in credit markets that threatens the banking system or the flow of money.  That is a huge difference, a crucial facet that equity investors need to understand.

None of this means that stocks are condemned to further declines or that the effects of the current volatility will metastasise in nasty ways.  The situation remains fluid, and volatility can work in either direction.  But if you’re expecting the cavalry to ride in to save the markets from themselves, don’t.

Corporate news in Australia:

-ASIC has transitioned its inquiry into WiseTech Global ((WTC)) founder Richard White’s share trading and market disclosures from a preliminary review to a formal investigation.

– Founder of WiseTech Richard White has been reappointed to lead innovation and Zubin Appoo has been hired as Chief of Staff.

-Institutional investors are asking questions about the unexpected departure of two independent directors from Mineral Resources ((MIN)).

-Australian footwear retailer Wittner entered administration due to falling sales and rising costs.

On the calendar today:

-NZ 1Q CPI

-AU March Unemployment

-JP March Trade Bal

-EZ ECB rate decision

-US March Build permits

-US March Housing starts

-ALCOA CORPORATION ((AAI)) Qtr Report

-AMP LIMITED ((AMP)) Qtr Report

-BHP GROUP LIMITED ((BHP)) Qtrly Report

-CHALLENGER LIMITED ((CGF)) Qtr Report

-PILBARA MINERALS LIMITED ((PLS)) Qtr Report

-SOUTH32 LIMITED ((S32)) Qtrly Report

-SANTOS LIMITED ((STO)) Qtr Report

-TRANSURBAN GROUP LIMITED ((TCL)) Qtr Report

-YANCOAL AUSTRALIA LIMITED ((YAL)) Qtr Report

FNArena’s four-weekly calendar: https://fnarena.com/index.php/financial-news/calendar/

The Australian share market over the past thirty days

For more detail go to FNArena’s Australian Broker Call Report, which is updated each morning, Mon-Fri.

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