Week 17 (April 21-April 27, 2025)
The risk-off period that began in early April, just after the “Liberation Day” tariff announcements, has been quite unusual. A risk-off period refers to a time in financial markets when investors become more cautious and risk-averse due to increased uncertainty, fear, or market volatility. During such periods, investors typically move their money out of riskier assets-like stocks, high-yield bonds, and emerging market currencies-and into safer, more stable investments such as government bonds, gold, cash, or safe-haven currencies like the U.S. dollar and Japanese yen.
During previous risk-off periods, the impact on the U.S. economy has been softened by declining bond yields and a rising dollar, resulting in lower interest rates and increased consumer purchasing power. This time the price of the 10-year Treasury note fell more when denominated in all major currencies except the Chinese yuan. Foreigners were fleeing USD assets and Treasuries, meaning the pain was amplified.
It appeared that foreign investors were losing faith in the U.S. dollar and Treasury assets as reliable safe-haven options.
Last week, various explanations were offered for these events, such as Chinese selling and basis trade issues. However, we found it hard to believe that a single factor was solely responsible.
The data indicates that Japanese investors were significant sellers of foreign long-term debt-primarily U.S. dollar-denominated bonds-while at the same time, they were heavily buying foreign equities. Essentially, they were shorting the USD by increasing their USD-denominated liabilities and investing in non-U.S. equity assets. Japanese investors were not the only ones reducing their holdings of US assets. However, attributing all the recent selling to China and Chinese investors is not supported by the available data-at least for now.
This was essentially a U.S. capital flight scenario: stocks, bonds, and the dollar all weakened, while gold soared to record highs. Although this pattern is new for the U.S., it’s a familiar occurrence in emerging markets that are experiencing financial distress.
The exodus from the U.S. dollar is evident in the dramatic surge in gold prices, which have reached record highs across all major currencies-including the Swiss franc, a currency widely considered a “hard” safe haven. The recent buying spree appears excessive and rapid. Using gold as a real-time indicator of sentiment toward the USD, it seems a reversal was bound to happen. The reversal took place last week, when the gold ETF formed a bearish outside reversal pattern on high volume-a classic sign of a potential downturn. The recent pullback in gold isn’t unexpected. From a technical standpoint, it makes sense to anticipate some sideways consolidation over the next few weeks before the bullish trend continues.
The market has staged a strong rebound from deeply oversold levels. This recovery was driven by Trump easing his stance toward Powell and partially reversing his position on the China tariff dispute. The recent rally reflects a mean reversion: growth stocks have surged, while gold and defense stocks have declined. We anticipate that the rally will soon top out, after which the market will likely enter a trading range before entering another downturn that retests the previous low.
We continue to believe that a mild recession is probable. If a recession does occur, the Fed will likely lower interest rates, inflation should subside following any tariff-related spike, and bond yields are expected to decline. However, there is little room left for additional fiscal stimulus.
OUR TRADES
Given the persistent market uncertainty and lack of a clear direction, we are concentrating on tactical macro trades and short-term positions, adapting our strategies as conditions evolve throughout the day. We’ll continue to watch the markets closely for signs of a potential shift, as it remains challenging to determine the overall trend until trade tensions ease and the outlook becomes clearer.
We believe that in these uncertain times, markets outside the US present greater value. Therefore, we are closely monitoring emerging markets and Europe.
We invite you to become a paid subscriber to gain exclusive access to our trade recommendations, including buy and sell signals shared directly with our subscribers.