The Overnight Report: Not So Fast

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Overseas markets continued to rally as the White House struck a more conciliatory tone, but momentum faded over the day in the US. ASX200 futures are pointing to green on screen for the last day of a short week.

World Overnight
SPI Overnight	7946.00	+ 13.00	0.16%
S&P ASX 200	7920.50	+ 103.80	1.33%
S&P500	5375.86	+ 88.10	1.67%
Nasdaq Comp	16708.05	+ 407.63	2.50%
DJIA	39606.57	+ 419.59	1.07%
S&P500 VIX	28.45	– 2.12	– 6.93%
US 10-year yield	4.39	– 0.00	– 0.05%
USD Index	99.70	+ 0.96	0.97%
FTSE100	8403.18	+ 74.58	0.90%
DAX30	21961.97	+ 668.44	3.14%

Good Morning,

US markets continued to rally overnight, albeit moving off the intraday highs, with reports hedge funds were continuing to cover short positions on the Administration’s backpedalling on China and Powell. 

What happened overnight: Extract from NAB Markets Today Research

The past day has been marked by a softening on the Trump posture toward both Fed independence and China. 

After the US close on Tuesday and early local time yesterday, Trump said he had no intention of firing Powell and that tariffs on China can come down substantially, but won’t be zero. WSJ reporting gave some further fuel to hopes of a de-escalation pathway in the US-China trade situation before comments from Bessent that Trump hasn’t offered to take down US tariffs on China on a unilateral basis saw some retracement.

The WSJ reported that a senior White House official said China tariffs were likely to come down to between roughly 50% and 65%, while other people familiar with the matter suggested the administration is also considering a tiered approach like the one proposed by the House committee on China late last year that would also include a multiyear phase-in period. 

After the US close, the FT reported Trump exempt car parts from some tariffs to destack duties. Car parts were already exempt from the reciprocal tariffs but would also be exempt from steel and aluminium tariffs where there is an overlap and from fentanyl tariffs. The exemptions would leave in place the 25% tariff on cars and the separate 25% on auto parts due to take effect from May 3.  

The S&P500 opened more than 2% higher and was up as much as 3.4% before gains were pared. The index still rose 1.7% on the day. 

The Euro Stoxx600 index was up 1.8%. The US 10-year rate traded a low of 4.25% on the prospect of reduced China tariffs, before reversing course, and it currently sits around 4.39%, -2bps lower over the day. Brent oil was -1.9% lower as OPEC Plus tensions with Kazakhstan added to concerns of supply increases.

On the data side, PMIs were generally a little softer than expected, driven by the services sector as manufacturing was marginally stronger than feared. Figures were consistent with very weak growth for the UK, the Euro area, if not stagnation, and sluggish growth for the US. The survey was taken 9-22 April, after the liberation day tariffs and 90-day reciprocal tariff pause announcements.

In Europe, S&P Global notes “business activity was held back by a faster reduction in new orders and waning confidence in the year-ahead outlook.” Input and output price increases both eased. 

In the US, the composite PMI slowed to a 16-month low, but only to levels consistent with sluggish growth rather than a sharper collapse. Services exports (including tourism) was a particular weak spot. Output prices rose at the sharpest rate for just over a year, with an especially steep increase for manufactured goods.

Also from the US was the Beige Book, based on information collected up to 14 April. It noted the outlook “worsened considerably” in several regions as economic uncertainty increased and also called out reduced leisure and business travel. 

On prices, most businesses expected to pass through additional costs to customers but there were reports of margin compression due to soft demand, especially for consumer-facing firms. 

As for how firms are responding to uncertainty in their pricing decisions, the Beige Book noted, “Firms reported adding tariff surcharges or shortening pricing horizons to account for uncertain trade policy.” 

The labour market was again somewhat insulated from broader uncertainty outside of government roles or roles at organisations receiving government funding, though there was a slight deterioration from the previous report. Several districts reported firms were pausing or slowing hiring until there is more clarity on economic conditions, but there were only scattered reports of layoffs.

There was plenty from ECB officials. ECB’s Lagarde spoke in Washington and said “particularly if there is no countermeasures decided by Europe, I think the net inflation is uncertain at the moment, but probably it’s going to be disinflationary more than inflationary” pointing out that China “will have overcapacity, will want to reroute its exports somewhere, possibly to Europe, that would have a dampening impact on prices.” Villeroy agreed, saying the inflation impact may be on the downside overall and that further cuts this year were likely appropriate. 

Muller said rates need to be cut below neutral, and it is too soon to say if June will be a cut or a pause, whereas Knot said the medium-term inflation outlook is less clear and it is best for rates to be at neutral levels for now.

Shifting Liquidity Dynamics a Potential US Equity Headwind: Robert Almeida, MFS Investment Management  

When volatility hits financial markets like it has in recent weeks, it’s often accompanied by a spike in demand for cash and a drain in liquidity. For example, while US equity volumes surpassed all-time highs in April, liquidity shrank, exacerbating price dislocations.

While the excessive gap between volume and liquidity may have been anomalous, it may help investors discern which equities are the most vulnerable if liquidity tightens.

Back in the early-2010s, deflation concerns were front and center. Policymakers, particularly in the US, were desperate to prevent a negative feedback loop of falling prices and money velocity. The solution was liquidity creation, but the problem was how. Liquidity can be created in one of two ways, economic growth or borrowing.

With banks and households in austerity mode and companies outsourcing tangible fixed investment to Asia, growth wasn’t an option. Debt creation through quantitative easing was the path chosen by the United States. 

The hope was that borrowed funds would drive spending, lift inflation and reignite economic prosperity. But the growth in money supply failed to produce economic growth because the transfer mechanism of liquidity to the real economy was broken as banks weren’t lending, consumers weren’t spending and companies weren’t investing.

US Equities are longer duration

Partially because of the dominance of technology companies, we believe US companies have superior growth rates than the rest of the world. This manifests itself in a higher terminal value and lower return of cash flows to investors as cash is reinvested in the business rather than distributed to shareholders.

In bond parlance, US equities, particularly US growth and technology companies, are longer in duration than mature, lower-growth enterprises.

This matters in the context of market liquidity.

While most market participants think about market liquidity as the ability to trade a security around the price quoted, we can also think about it through the lens of the time value of money. An asset’s liquidity beta is a function of market capitalisation compared with its duration. Through this lens, the greater the duration, the less liquid or more sensitive the security is to changes in market liquidity. 

Why might this matter, looking ahead?

Tariffs reduce liquidity.

While the situation remains fluid, I think it’s fair to assume we’ll face more tariffs in the foreseeable future than we did before, regardless of the rate.

Given that the US consumes more than it produces, tariffs are a tax on net importers, meaning companies who import goods to builds things, but also households.

This tax, no matter the ultimate level, will pull money out of the real economy and threatens what we believe are elevated but unsustainable profit margins.

Conclusion

Shakespeare wrote in The Tempest: “What’s past is prologue.” While perhaps not exactly, the past can help inform us about the future.

The US runs a historic budget deficit, and the massive amount of liquidity created by US policymakers over the past 15 years has had a direct impact on long duration assets.

It’s always profits and cash flows that drive stock prices.

And for much of this century, US companies have benefited the most from the tailwinds of globalization and artificially low interest rates, which resulted in historic levels of profitability.

As I have written about extensively, those tailwinds are becoming headwinds. I believe that if liquidity is drained by tariffs, either slowly or quickly, it may also serve as an additional tailwind for further outperformance for non-US equities and for public assets over private ones.

Corporate news in Australia

-Cooper Investors has seen funds under management fall to $6bn from $14bn, 18 months ago.

-Mineral Resources ((MIN)) loses the third member of its ethics committee.

-Treasurer Jim Chalmers has directly raised with the ASX chairman its decision allowing James Hardie Industries ((JHX)) to shift its primary listing without a shareholder vote, though he also suggested he is reluctant to intervene.

On the calendar today:

-NZ April ANZ consumer confidence

-JP March PPI

-US March durable goods

-US March existing home sales

-Coronado Global Resources ((CRN)) March quarter production update

-Newmont Corp ((NEM)) Qtr Report

-Resmed ((RMD)) Qtr Report

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

Spot Metals,Minerals & Energy Futures
Gold (oz)	3306.39	– 85.85	– 2.53%
Silver (oz)	33.60	+ 1.10	3.38%
Copper (lb)	4.84	– 0.02	– 0.32%
Aluminium (lb)	1.11	+ 0.02	1.87%
Nickel (lb)	7.06	+ 0.01	0.16%
Zinc (lb)	1.20	+ 0.02	1.41%
West Texas Crude	62.29	– 1.23	– 1.94%
Brent Crude	66.12	– 1.18	– 1.75%
Iron Ore (t)	100.30	+ 0.38	0.38%

The Australian share market over the past thirty days

Index	23 Apr 2025	Week To Date	Month To Date (Apr)	Quarter To Date (Apr-Jun)	Year To Date (2025)
S&P ASX 200 (ex-div)	7920.50	1.30%	0.98%	0.98%	-2.92%

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
AMP	AMP	Upgrade to Buy from Neutral	Citi
GMD	Genesis Minerals	Downgrade to Hold from Accumulate	Ord Minnett
MVF	Monash IVF	Upgrade to Buy from Hold	Ord Minnett

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

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available on the FNArena website.  Click here. (Subscribers can access prices on the website.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author’s and not by association FNArena’s – see disclaimer on the website)

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