USA and China trade war. US of America and Chinese flags crashed containers on sky. 3d render

Trade Wars: The Return of the Tariff Man

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The flu has been running wild in my house. Everyone has gotten it, and I have had it since mid-week. So, I haven’t wanted to do much and haven’t been paying attention to the market.

But it is pretty early in the day, and I feel well enough to get something out to you.

The Tariff Man is back, and I guess at this point, those on social media who thought that tariffs were negotiating tactics and thought Trump was bluffing weren’t around during Trump 1.0. This version of Trump 2.0 seems even more emboldened, given the size of his win. With that, tariffs were placed on Canada, Mexico, and China. Worse, those countries are all preparing or have already announced countermeasures.

The IG US 100 CFD is trading lower by about 1.3%, indicating where Nasdaq futures might open tonight.

Bitcoin doesn’t like the news either, and it is trading lower by nearly 3% this weekend. But until Bitcoin breaks below 91,000, everything that happens is just noise. That support level has held multiple times.

Certainly, 2-year inflation swaps can move higher from here if the market fears the inflationary impacts of Trade Wars on the economy. The swap has been consolidating at the upper end of the trading range for some time, and a breakout would not be favorable for the Fed’s fight against inflation.

Speaking of the Fed, the market still thinks there is a good chance the Fed is finished with cutting rates. The 3-month Treasury 1-year and 2-year forwards are trading in line with the 3-month Treasury spot rate.

Trade wars will complicate the market when realized volatility and implied volatility are low. This means that if we start to see days when the S&P 500 moves by roughly 75 bps or more, realized and implied volatility will begin rising.

This, of course, comes at a point in the cycle where implied correlations are very low. The 1-month implied correlation is at 8, despite the sell-off we saw in stocks on Friday. Readers of this commentary know that when the 1-month implied correlation index bottoms and starts to rise, the S&P 500 tends to put in a short-term peak.

Implied correlations were due to rise anyway because the volatility dispersion season is now ending. Implied volatility for the Fab 5 started falling last week, with just Amazon and Alphabet left to report; the rest will come down this week. But more importantly, if volatility returns to the S&P 500 and IV starts to rise, and stock IV rises too, correlations will increase.

We will see where things stand after Monday.

-Mike

Terms By ChatGPT:

IG US 100 CFD – A contract for difference (CFD) based on the Nasdaq 100 index, allowing traders to speculate on price movements without owning the underlying asset.

•Inflation Swaps – Financial derivatives that allow investors to hedge or speculate on future inflation by exchanging fixed payments for payments linked to an inflation index.

•3-Month Treasury 1-Year and 2-Year Forwards – Contracts that predict where short-term Treasury yields will be in the future, helping gauge market expectations for interest rates.

•Realized Volatility – The actual historical movement of an asset’s price over a period, measuring how much it fluctuated.

•Implied Volatility (IV) – A measure of expected future volatility derived from options prices, indicating market uncertainty.

•Implied Correlation Index – A metric that shows how closely stocks within an index are expected to move together, with low values suggesting more individual stock dispersion.

•Volatility Dispersion – A trading strategy where investors bet on differences in volatility between individual stocks and the overall market.

•Fab 5 – A term referring to the top five most influential tech stocks, often including Apple, Microsoft, Amazon, Alphabet (Google), and Meta.

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