Could “Liberation Day” be a buy-the-news event for equities?
If you know markets, you’re aware of the tendency for risk assets to rally when a given event risk clears, and April 2 carries meaningful event risk. That’s the day Donald Trump will — and forgive me for the sarcastic cadence; it’s regrettably unavoidable — liberate America from the tyranny of globalized trade and commerce by taxing the bejesus out of anyone and everyone with the gall to enact trade barriers which impact US exports.
To be fair to The White House, that’s a bit of a mischaracterization. And it’s (obviously) meant to serve a comedic purpose here. And yet, there’s a sense in which “reciprocal” is in the eye of the beholder, which is to say it’s not obvious Trump’s committed to an apples-to-apples approach in pursuit of reciprocity. I won’t bore you with the details, but he doesn’t always distinguish between different kinds of protectionism, preferring this instead: Does it disadvantage US products in a foreign market? Yes? Well then it’s a tariff, and we need to reciprocate.
Anyway, markets are worried about “Liberation Day” and some attributed Monday’s upbeat tone on Wall Street to weekend reporting which suggested Trump’s going to demonstrate something that looks vaguely like rationality when it comes time to emancipate America next week. I don’t know what to say about that notion specifically, but I will say that equities could see some relief if “Liberation Day” comes and goes without any surprises. In other words, unless Trump wakes up next Wednesday in an especially vindictive mood, the new levies may already be in the price. (Already in the price of stocks, I mean. They’ll be in the price of your groceries and all sorts of other things starting midway through next month.)
If that’s the case (i.e., if stocks have found, and bounced off of, a local low), it’s worth flagging the potential for re-leveraging among key cohorts which de-risked into the correction. “The tariff bear case has been modestly reduced… which the market is embracing with meaningful relief and the bull case could [also] benefit from the release of tangible tariff details on April 2, which will finally provide [the] C-Suite the visibility required to move forward with their tariff strategies, and [afford] investors and economists clarity thereafter, acting in turn as a hypothetical vol-dampener,” Nomura’s Charlie McElligott said Monday, noting that already, five-day trailing realized’s receded by half amid the resumption of vol-selling flows.
That vol compression can continue in the absence of new shocks as key “down” days for the S&P drop out of the key one-month lookback, as illustrated on the right, below.
Charlie’s annotations help walk you through the progression and the dynamics at play.
“As realized vol adjusted higher in the months since the election, vol-sensitive systematic strats have been a slow deleveraging bleed of accumulated exposure while simultaneously we see meaningfully cleaner positioning after the substantial asset manager / long-only selling in US mega-cap tech and the large ‘net down’ from the hedge fund community, setting up both the potential for fundamental and systematics needing to buy back this nascent rally in US equities if it begins to get away from them,” McElligott went on.
Sticking with vol control, there’s potential for sizable re-leveraging in equities assuming a well-behaved index.
The projections in the green box, above, give you a sense of the latent bid for equities assuming minimal (or even just <1%) average daily swings in spot. So, nearly $34 billion in buying over two weeks assuming an average daily move of 0.5%, for example.
As McElligott noted, this comes as markets can expect at some rebalancing flows into quarter-end tied to stocks’ underperformance in Q1, and also amid vol supply and other “stabilizer” dynamics (if you will) tied to expiring options.
The usual caveat applies: Tariff Man’s penchant for capriciousness, something Trump openly celebrates as a virtue, means it’s hard to get comfortable with newly-initiated equity longs.
Charlie was diplomatic, God bless him. “All of these ‘less bad’ things being said, it’s pretty darn difficult to put meaningful ‘long risk’ on based on trial-balloon reports which remain exceedingly low on details, and with a Trump administration which seems quite comfortable utilizing their ‘intentional policy volatility’ as a weapon.”
From what I’m reading, the tariff uncertainty will be even higher come April 2.
Imported auto “levies” now threatened. “Reciprocal” tariffs a case-by-case thing, maybe a country gets “a break”, maybe not, maybe the break vanishes. Semi, lumber, pharma tariffs promised. And what’s this talk of a $1-3MM “levy” (is that the new word they learned?) per ship docking at US ports? And a blanket 25% tariff on everything from any country that buys Venezuelan oil? VAT tariffs still in the mix?
So, a version of the chaotic day-to-day changing uncertainty that Canada and Mexico have, but now globally.
No, the tariff uncertainty is not getting any better come April. We’re in a rally window now.
The largest buyer of Venezuelean oil is the US, but Trump may give it an exemption.
Don’t forget about policy volatility’s ugly brother — policy ambiguity — which I believe is also intentional to allow our mercurial Golf Champion maximum optionality. But even in the absence of new announcements or changes, there are still a lot of people wondering how much any of this (not just tariffs) might affect them and just what response might be warranted when they can’t see around the curve, of if there even is a curve anymore.
When in doubt, best to say something nice and see if the Presidential Library could use some walking around money.
Trump is mostly flavor of the day except when it comes to being vindictive. He’s certainly mercurial. Trump 1.0 was letting a 240 lb toddler think he was running the show while a group of adults cleaned up the messes. This time around the semi responsible adults have been replaced by opportunists who mostly lack the requisite training, experience and character required. Just look at the Houthi attack plan fiasco. None of the top 5 officials responsible for the nations security had a clue their communication method was absurd and dangerous. How in the heck are the Gang That Can’t Think Straight going to be able to create a relatively stable economy. We are in a push pull situation at least as long as Baby Huey sits on the thrown. For me there’s a lot more downside risk than upside. If your betting heavy, better stay ultra nimble.