April is only halfway through, and the past few days have almost felt like holiday markets as realised volatility is plummeting compared to what we observed last week. The US Dollar is finding strength again while US Treasuries are catching a bid with yield curves flattening while stocks are holding their ground. This is relatively normal market behaviour after large volatility events. It doesn’t herald any new information but gives everyone time to re-assess. The dislocation in the USD vs Rates move, however, has been quite unique, as the chart below explains the current strengthening back of the dollar while treasuries are rallying.
What’s next, you ask? To me, not much has changed from the overall macro script I presented a few weeks ago. The tariff shenanigans continue, but prices have drastically changed. Bessent and Trump have seemingly struck the equity and bond puts last week, which has prompted the market to stabilise. This is the perfect time to reflect and adjust as necessary. Our reversal models have flagged the potential for stocks to bounce, and that has now played out. I will discuss behind the paywall what I foresee for equities as we advance. A little reminder that I’m running a 30-day special discount on all subscriptions. Find the link below if you are ready to join the pack.
I would recommend two great pieces that will give you excellent historical and financial market context. The first one is by the excellent Myrmikan Research, whose article explores the intersection of ancient wisdom and modern economic issues, particularly focusing on trade imbalances, tariffs, and the U.S. economy. It critiques classical economic theories like Ricardo's comparative advantage in the context of a modern world dominated by fiat currencies, credit bubbles, and global capital flows. They argue that current trade imbalances and the decline of U.S. manufacturing are not solely a result of economic theory but also political decisions and the overextension of credit. It suggests that the solution may lie in returning to a gold-backed currency system to restore balanced trade, national security, and economic stability while cautioning against the risks of continuing with current financial practices.
The second article is by the outstanding team at Convex Strategies, and you might have listened to David Dredge on some podcasts. Their latest thought piece discusses the fragility in Treasury markets, focusing on moral hazard created by financial systems designed to mitigate risks at the expense of long-term stability. It critiques the interactions between asset managers, hedge funds, and broker-dealers in Treasury market fragility, emphasising the "Bond Basis Trade" and the excessive leverage in the system, which could trigger a financial crisis in times of stress. The update references a recent Brookings Paper proposing a safety net for hedge funds through a specific bond-basis bailout facility from the Federal Reserve to mitigate risks of market dysfunction, though it warns of moral hazard. The discussion continues with a critical view of the reliance on leveraging strategies in the financial system, calling for more capital and less leverage to reduce systemic risk and questioning the need for the complex intermediation chains that contribute to market fragility.
Let’s now check out some updated charts and their implications
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