Moneycontrol Pro Panorama| Headless chicken markets

The markets are betting that it will get better as Trump starts to walk back from the brink.

Dear Reader,

The markets are see-sawing with every statement from Trump and his team, often wildly at variance with what they said a day earlier. For example, this week we saw in rapid succession claims that the tariffs on China wouldn’t be as high as they are now, that the trade war with China is unsustainable, that there is opportunity of a big deal between the US and China, that the EU and China are ripping off the US, that there is no time frame for the start of US-China trade talks, that a full China deal may take 2-3 years, and the latest so far by Trump that he’s ‘going to get along great with China, no doubt.’ That alone should explain why the market is running around like a headless chicken, and there are numerous such examples.

But there is hope. The big reason why the markets are optimistic is that they believe that, if the markets tank, particularly the bond markets, Trump will backtrack rapidly, as he did when he announced a 90-day pause on the so-called reciprocal tariffs for all countries except China earlier this month. We had said at the time that it was a U-turn, not a resolution.

The markets are betting that it will get better as Trump starts to walk back from the brink. But as this analysis of the IMF’s World Economic Outlook report points out, the hit to growth this year will be harder for the US than for China. In fact, the headline for the S&P Global Flash PMI for the US for this month is, ‘Output growth hits 16-month low as confidence slumps and selling prices rise at increased rate.’ Commenting on the US flash PMI data, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said: “The early flash PMI data for April point to a marked slowing of business activity growth at the start of the second quarter, accompanied by a slump in optimism about the outlook. At the same time, price pressures intensified, creating a headache for a central bank which is coming under increasing pressure to shore up a weakening economy just as inflation looks set to rise.’’ Add to that the IMF’s WEO report clearly saying, ‘Despite significant equity market corrections in early March and April, price-to-earnings ratios in the United States remain at elevated levels in historical context, raising concerns about the potential for further disorderly corrections.’ It’s no wonder then that the MSCI USA equity index is down 4.1 percent this month, while MSCI EU is up 2.4 percent and the EM ex-China MSCI equity index is up 1.5 percent.

MSCI India is up 4.2 percent this month, signalling its return to investor favour. While the IMF has lowered its forecast of India’s GDP growth to 6.2 percent for the current fiscal year, that’s still a far higher growth rate compared to other large economies. The India Flash Composite PMI for the month is 60, compared to 51.2 for the US, 48.2 for the UK, 50.1 for the Eurozone and 51.1 for Japan. And while the PMI is far from being representative of the entire economy, it matters for the markets. RBI governor Sanjay Malhotra said at the last Monetary Policy Committee meeting, ‘I believe that robust domestic demand will cushion the impact of external headwinds as in the past.’ As if on cue, Hindustan Unilever has reported 2 percent volume growth for the January-March quarter, better than expected.

And then there is the hope that India may benefit from the anti-China sentiment. The State of the Economy report for the month by RBI researchers says, ‘Going forward, India is poised to benefit from supply chain realignments, diversified FDI sources, and engagement with global investors seeking resilience and scale, given its already established trade linkages.’ Vivek Kelkar pointed out, however, that ‘For India, the recent visits of US officials, including the just concluded visit of US Vice President JD Vance might well be diplomatically very useful, but New Delhi’s trade dilemmas and the China factor in India’s trade and manufacturing will pose tricky questions.’

And then there are the unprecedented levels of uncertainty. As Dinesh Unnikrishnan points out in his analysis of the Monetary Policy Committee meeting, the word ‘uncertainty’ popped up 14 times in the minutes. No wonder gold has become, as Vatsala Kamat wrote in this article, a consensus safe haven.’

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Corporate America puts Wall Street on alert over damage from trade war (republished from the FT)

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Markets

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Manas Chakravarty Moneycontrol Pro