Sifting Through the Trade War Market Trends | Andreas Steno Larsen ft Mikkel Rosenvold | Macro Mondays

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1:28Hello out there. Welcome to another edition of Macro Mondays. My name is Milo Osnall. I'm back in the driver's seat after Easter vacation last week. And with me as usual, Andres Dino. Welcome to the show, Andres. Thanks very much, Mikkel. Thankfully, we're not in our vacation homes in Spain or Portugal yet, because there's basically a grid outage ongoing in the southern parts of Europe. Currently, we don't really know why. I think the local authorities had had a call with local reporters just recently. maybe an hour ago. And apparently there is something going on there. So I can't recall having seen such a blackout Europe before, but something is going on in Spain and Portugal.

2:13Yeah, it's very, very rare in Europe, especially if you have this on a countrywide level. And obviously the why or who is the most interesting part here could just be some error. I think for many people down there, are they even going to notice? I mean, you probably spend most of the day outside there. or having Chiesta. So I don't know if they've even noticed down there, but they will be in the evening. Anyway, Andreas, we have lots of power up here as long as we can tap onto nuclear plants around Northern Europe. So that works really well for us. Hi, Raoul here. Listen, I think we've got until 2030 before the economic singularity arrives.

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3:32Before we get to all that, just a reminder that this is our weekly sneak peek into the analysis and research that we do at Steno Research and publish at Real Vision. We have every week, Sunday or Monday, your Steno Signals editorial, the flagship post, you could call it, always worth a read. Later in the week, we also have our energy slash geopolitical piece called The Drill. That's out tomorrow, usually on Tuesdays. And by the end of the week, we also compile our trades and portfolio updates. So lots of stuff to cover you if you're a pro macro member at Real Vision. If you're just here for the free show, that's also quite okay.

4:12In any case, remember that our usual, as our usual reminder that our trade ideas, they may be sometimes... Sometimes it may be good, sometimes it may be shit. Exactly. Very important to keep that in mind. So, Andreas, before we get to the trade war, to what happened last week and what's going to happen, let's just start off with this picture. I mean, it's as iconic as it gets, I think, by now. President Zelensky, President Trump sitting in the Vatican on an incredible marble floor. I think it was inside St. Peter's Church. Quite the spectacle this weekend. Do you think markets have reacted to this?

4:55are they anticipating? What do you think of that before we get to analyzing the Ukraine war? Yeah, well, I'll allow you to touch on the sort of geopolitical aspects of this in a second. But if you look at the price action across European equities and European fixed income, to me, it seems like the market has sort of lost its enthusiasm around the prospects of the peace deal. Poland has been a really solid equity market this year, but it's trading more in line with what we see elsewhere now. It was a very idiosyncratic story around some of the surrounding countries of Ukraine earlier this year, especially during the early innings of what appeared to be some sort of swift peace plan from Trump's administration.

5:48The euro hasn't really gained a lot of traction say over the past couple of weeks, especially not after this meeting either. We're rather seeing a slight move in the opposite direction now for the euro versus the dollar. And in energy markets, we haven't really seen any major response to this either. I don't know what these two guys talked about, or I guess I know the topic, but we haven't heard a lot about what was actually said there. I could see on my Bloomberg screens, Basically, was it 50 minutes ago, maybe an hour ago, Mikkel, that Ukraine now suggests a 30-day ceasefire again? But I kind of struggle to be enthusiastic as well about the peace prospects, but I don't know whether you see it differently from me.

6:41I'm perhaps slightly more upbeat here. I think what we're seeing from the parties right now is that they are obviously standing very, very firm on their demands, especially the Russians. but they're also trying to keep this process alive. So obviously it's a little bit laughable that President Putin has announced that he will over the, I think it's the 8th of May, 9th of May, they're celebrating the victory day from the victory over Hitler, Germany. They will be conducting a 72-hour truce. And obviously the Ukrainians are laughing at that. In any case, this suggests to me, and they did a similar attempt at a truce over Easter, which was not really a truce, wasn't really kept by anyone or respected by anyone.

7:20But it signals to me that the Russians want to do just enough to keep Trump in this process. They want to keep the U.S. in the room and the talks ongoing, but they want to stall them as much as possible. At least that's better than the Russians leaving the room, that they're trying to keep everyone in the room. It's not a sign that we're going to have an all-out ceasefire really soon. There are still some major hiccups to that. I think one of the discussion points in the Vatican was most likely President Zelensky's refusal to even consider acknowledging Russian control over the Crimea Peninsula.

8:00It's a fair stance for him to have, but it's not very constructive to go out in the Wall Street Journal with such a stance. That's not really helpful for negotiations. So I understand why the U.S. was displeased with this. Obviously, the U.S. has also criticized Putin for launching massive attacks against Kiev, etc. So there is absolutely zero trust between the parties. The U.S. is trying to broker this peace deal. Trump and his team has done a terrible job so far, we have to admit. But they're still in the room. They're still talking. There might be some movements. So I'm still a little bit hopeful that we might get some peace before summer.

8:41But as you said, it seems like markets are getting really, really tired of this story. And even an all-out peace deal might not move the needle too much for European equities. It might move a little bit in the nat gas, oil markets, and perhaps also in softer commodities. But yeah. I guess it also depends on who's going to pay the bill. Because there will obviously be a big bill to pick up, almost no matter how this peace talk ends. and at least we got a small you know early glimpse of what could happen if we get some sort of a ceasefire that is funded by europe which i guess is what trump and jd vance and so on and so forth ultimately um what wants europe to do they want europe to do right so the point here is we saw a spike in european bond yields on the back of this headline um and that's probably something you should consider if we get a peace deal, Germany will have to pay a lot.

9:44And German bond yields are very low relative to peers right now already. So that's something to consider. Have you ever wanted to trade Bitcoin but haven't dared try? With Plus500 Futures, you can trade crypto without the hassle of opening a wallet. With just a few clicks, you can register and start practicing with their free and unlimited demo. See a trading opportunity? you'll be able to trade it in just two clicks. Feel ready? You can move to real money with as little as$100 once your account is approved. And the great thing is that in addition to crypto, Plus500 gives you access to a wide range of instruments.

10:19S &P 500, NASDAQ, gas, and much more. Explore equity indices, energy, metals, Forex, and beyond. With a simple and intuitive platform, you could trade anytime, anywhere. Experience the fast, accessible futures trading you've been waiting for with Plus500. With over 20 years of experience, Plus500 is your gateway to the markets. Visit us.plus500.com to learn more. Trading in futures involves the risk of loss and is not suitable for everyone. Not all applicants will qualify. Plus500, it's trading with a plus. Very fair point, Andreas. So I think that's the main takeaway here. While we're at your politics, we've been receiving a bunch of questions.

10:58And by the way, you're very encouraged to post questions as we speak here. We've received some questions about what's going on in South Asia between Pakistan and India. Just a very, very quick brief there. Last week we had a major terrorist attack with an Indian-controlled Kashmir. India claims links to the Pakistani government. We haven't seen really any evidence of this so far, but it's not too far-fetched based on what we've seen before. This has caused both sides to escalate diplomatically and carry out missile tests in the waters south of Pakistan. Also caused the Indians to cut off some of the water supply, which is, I think it's called the jugular vein of Pakistan, which is usually called all the rivers coming from the Himalayan mountains.

11:43So very, very tense situation. The reason why we're talking about it is obviously because both sides have nuclear weapons. And we know that the Pakistani nuclear doctrine is that they don't have to be attacked by nukes before they attack themselves at a sufficiently large conventional attack may trigger a nuclear launch from Pakistan. We know we're near that point yet, but just something to keep note of because this could trigger some instability and uncertainty in markets, especially as India is a cornerstone in this ongoing trade war, Andreas, and perhaps that's a pivot to talk that way. We touched upon, I think, last week a little bit about Apple and iPhone production.

12:27Now it seems like most of the iPhone 7 is going to be produced in India as part of this trade war. But in other news last week, we had Donald Trump essentially perhaps tiptoeing his way towards a U-turn. Was that what you saw? I think it was on Wednesday or the night before Wednesday, which the market really, really welcomed. We had some positive news about him not wanting to fire Jay Powell. So where do you see this trade war right now, Andreas? Maybe we could start with a comment on the trade ties between the U.S. and India. Initially, I thought India would be a country suffering a lot from these reciprocal tariffs, as India have very, very high import duties on everything from food to steel and aluminum, stuff like that.

13:16But India has actually responded pretty well to the attempts of cornering China from the U.S. administration. We've seen a response from India where they've added import duties on Chinese stuff in response to this trade war, which is exactly what Trump and Besant want from India to see progress in the trade talks between the U.S. and India. Scott Besant said just recently that India is probably the country that will get a trade deal first. My best guess a week ago would have been Japan, but Japan and India are being fast-tracked, both of them, since the U.S. can use these two huge countries, huge trade partners to corner China in these ongoing negotiations.

14:06in relation to what's ongoing between the u.s and china um and i'm very curious to hear your thoughts on whether they actually talk to each other that's basically been you know the talk of the town over the past seven days china china keeps saying no no no we don't talk uh to the u.s at all and trump is stating every day that they've had meetings with china so what's going on here um i've read a really really interesting report uh published by a guy called Ray Wang on X on Saturday. And I'm basically reading out aloud now that the report said that US retailers informed Chinese suppliers of a decision to continue shipments from China to the US of retail goods after a meeting between the Trump administration and some of these big retailers.

14:59Think of Walmart and the likes, right? Yeah. And as far as I understand it, if they ask their Chinese suppliers to resue shipments now, they'll tell these suppliers in China not to pay the import duty. And then they'll pay the import duty once the ship arrives in a port in the US, allowing for, say, 45 days from now and until the import duty payment. You could see that as a pretty clear hint that Trump Besant basically told these retailers maybe we'll de-escalate stuff, de-escalate tensions within the next month. I think that's a feasible outcome now. Scott Besant referred to these China tariffs as unsustainable.

15:57he said again today that they're anxious not to escalate things once again next step would be a complete embargo on China if things do not escalate from here so all in all I think this situation can almost only improve from here and you know the market is always very focused on the rate of change So if we're at a really bad spot, but we're improving, that could keep the positivity and the feedback loop alive in markets in many ways. And that's why I've spent the last couple of research papers looking into the similarities between the current situation and what happened in March 2020. Because I think that parallel is getting increasingly solid.

16:55we have a Polish due to the Liberation Day tariffs but we also have a solution to the Polish which is dialing back on it right so to an extent it feels very reminiscent of this lockdown reopening playbook where you have a policy decision with a big economic impact but you also have the solution you can just reopen again right yeah and the solution seems to be much more front because back in 2020, you did have a supply shock. It seems like the Trump administration is trying to prevent a supply shock by letting or by getting Walmart, Hope Depot, et cetera, to keep shipments from China flowing. Because if you've got a one to two month gap in shipments from China, that would be a supply shock to consumer markets, even though we've had a lot of front loading of stocks before these tariffs.

17:47But maybe we can show a chart on the container volumes from China. because it's obviously one of the charts that you need to track on more or less a daily basis at the moment to figure out whether we have a supply shock upcoming. I'm of the view that we had a lot of front-loading ahead of the tariffs deadline. And as you can see, we basically had front-loading all the way up until a few days after the Liberation Day in container volumes departing China. you can of course argue that the slump that we've seen say over the past 12 13 days is more than enough to create some sort of vacuum a couple of weeks into June roughly during that time span and you know I hold sympathy for that view but a vacuum of a couple of weeks is manageable because we know that inventories are very full of finished goods already.

18:54We've seen a tremendous amount of front loading since everyone kind of knew that this deadline was upcoming. And this chart from the Richmond Fed survey is probably the best chart I have in my macro slide right now. And we only have one instance in the history of this manufacturing survey, a very representative survey, of larger finished goods than new orders. So the dark blue being above the dark blue here, it's rare. But we saw that exact same pattern back in March, April 2020. So we have a lot of finished goods. We have very few orders incoming because everyone was kind of, you know, licking their wounds after this shock, which essentially means, and I stick to this extremely contrarian call, that I think inflation will drop a lot over the next, say, two or three months.

20:04Think of the inflation developments between March and June 2020. we actually had a pretty steep drop in yearly inflation in the US amidst the onset of the lockdown during the early innings of the pandemic. Again, that's kind of counterintuitive since we basically had a lockdown of the global supply chain in many ways as well. But there's also a demand shock. And typically, you get a very, very swift reaction ahead of stuff like a lockdown or a tariff shock upcoming, meaning that a lot of people have loaded up on inventories ahead of these things. So you can deal with a vacuum if the vacuum is not prolonged.

20:54And if the vacuum, say, is between three, four weeks at the max from a shipping perspective, we'll manage. So the whole question now boils down to whether we get some sort of de-escalation during May. And my best guess would be yes. But do you think the Chinese and the U.S. administration are talking to each other? At some level, they must be. I mean, the stakes are so high that they must be talking. My reading of this, and that might be completely wrong, because it's very, very tough to know what's going on inside the head of the president here. So I think he's trying to maneuver his way out of this whole terrorist thing.

21:37He's trying to phrase this as this is a new source of big revenue for the US government, etc. I think he's trying to find some sort of landing spot for this entire process. The question is, what are they going to get in return for lowering the tariffs? They're probably not going to get very much in return from India or Japan, perhaps some reciprocity there. But from China, I think they must be trying to work towards some sort of end to this. It doesn't seem like they're ready for a new round of escalations, as Scott Besson mentioned as well. So I think they're growing a little bit tired of this, just like they're growing very tired of the Ukraine situation.

22:16And they're probably trying to find some landing grounds for this and get back to focus on internal matters, because Trump's approval ratings are sliding fast. and it's not having very much luck in the global stage here, either with Ukraine or with the trade war against China. So it needs a couple of results that you can sell as victories and then get on to other stuff. That's my reading of this. One question in relation to this chart as well, Andreas. What happened in 2020 was obviously we had an uptick in orders as well and in demand. But to sustain that level of demand, you had to put out or push out a lot of government money.

22:59Do you think we're going to get to that point as well this time around? Because one thing is supply to recover from the supply shock. But what if this becomes a demand shock as well? So, I mean, we currently have a demand shock. There's not much doubt about it. And I guess the response will come from two sides here, both from the private credit system and from the public credit system in a sense. We've actually seen a decent tick up in bank lending over the past few weeks, which is in line with what we should expect, but it could be sort of turbocharged by the need for prolonged export credits and import credits given this very, very odd situation.

23:49and if you create more credit we saw the exact same thing in march april 2020 a lot of you know emergency credit given to um companies hit by the lockdowns you also create new money right so that's a way of catering for the demand side um i guess the smartest way to do this would be to kind of subsidize private credit to those hit by these import duties. And that's also one idea that's been floated by the Trump administration already for farmers, but also for some of the companies being hit by these import duties. So they're trying to underpin the private credit creation by subsidizing that whole process.

24:36On the other hand, if I'm right, that they'll dial back on tariffs, but at the same time, they've managed to sort of nuke the business cycle almost with these Liberation Day tariffs. We're talking about a situation where inflation will go down, most likely. Growth, at least in the very near term, will go down. And unemployment will likely go up. We obviously have the non-farm payrolls report coming up this Friday. everything surrounding that report smells fishy to me because the survey period includes the week including 12th of April so it was kind of during the worst part of all of this where things were escalating the stuff that we look at such as link up data data on job openings provided weekly looks absolutely terrible for that weak.

25:33So I think we'll get a very weak job report. So what I'm saying here is that inflation down, growth down, unemployment probably taking up a bit. It will be so crystal clear to everyone that you need to ease. And at the same time, we've had a really, really weak dollar during all of this, allowing the European Central Bank to ease, allowing Bank of Japan to ease up a little bit, allowing People's Bank of China probably also to ease. So all of the big central banks outside of the U.S. can ease comfortably because of stronger currency developments versus the dollar, while we're starting to see the first signs of the macro data also supporting the case for easing in the U.S.

26:16So all of a sudden we may end up in a situation where the Trump administration, probably due to some substance-like victories, who start dialing back on some of these tariffs and you'll get easing from everyone at the same time. And then it starts to resemble 2020 to a large extent. I think it's pretty, you know, I've been saying for a while that either the last week of April or the first week of May would be where we really saw a rebound. And we've basically seen it right already. So I'm getting increasingly upbeat, even though the outlook is pretty muddy here still. Yeah, because looking at all these macro factors, there shouldn't be a time to be upbeat about equities.

27:02But that's because of the huge sell-off we've already seen. But again, Mikkel, if you compare this to 2020 and look at the lessons learned there, of course we'll get bad macro data here in April and May. It's unavoidable, given that we've had this shock. But if the administration is already in the process of dialing back these tariffs, then we probably shouldn't care too much about this bad macro data, right? Because we'll get easing from central banks as a reaction function to it. We know that the problem is solved, so to speak. At least we're dialing back on the issue. and we may get a very coordinated easing campaign out of this on a global scale.

27:52So on some days, I kind of think this was maybe the plan all along. On some days. On other days, I think it's more of a coincidence. I don't know really. But at least if the bottom line is that they get a coordinated easing campaign, a weaker dollar, lower bond yields, all of, you know, it was basically everything that Scott Besson asked for back in January. But they figured out they couldn't get this done without nuking the process a little bit here. Yeah, and it is kind of everything put in reverse. Usually the textbook expectation of tariffs would be that you get an inflation hike, then a drop-off once growth starts to weaken.

28:41We've essentially had the opposite. You started by killing growth, and then you're probably, again, going to get some inflation from all the easing that's going on in the long term. So, yeah, probably have to rewrite some textbooks. And also, the entire pace of this is very interesting, Andreas. It seems like the pacing of policy news is just too much for macro data to keep up with, to keep it relevant. That's a whole other discussion, Andreas. we're coming towards the end of the show so let's just have one trade or some ideas into some positions that you're really hot about right now Andres yeah so we've had a great great month in the macro portfolio that we also reveal to our pro macro subscribers at Real Vision that's done research here among other things because we leaned into some of the trades performing when the dollar weakens.

29:38So the debasement trades have been solid through the month called Bitcoin. We've had a couple of very, very good niche bets in European equities. We're also starting to see lower bond yields in parts of the curve in the US. So I think everything, the stars are kind of aligning for some kind of 2020 setup to be replayed here. And that basically means that risk is doing better. And as you can see, maybe that's the last chart we can show today on the relationship between Bitcoin and the dollar. Typically, you need to see dollar weakness in advance of strength in Bitcoin. And I think it relates to financial conditions overall.

30:26I think it relates to this notion that a weaker dollar fuels softer financial conditions, fuels Bitcoin and other debasement bets. Gold is off the highs of the day, while Bitcoin is doing better. So I also think we're starting to see signs of a reshuffling of family office positioning back to Bitcoin from gold. So a lot of stuff is ongoing. And if I'm right, that will get very, very bad macro data, but at the same time, markets would kind of look forward, at least in equity and risk terms, we could get a really odd cocktail of commodities going lower and risk assets going higher into May and June.