AXIOMA ROOF™ SCORE HIGHLIGHTS

• US: CPI and PPI data. FOMC meeting minutes.
• Europe: Eurozone retail sales and Germany’s industrial production data. UK GDP estimate.
• APAC: China March inflation and trade data. Japan consumer sentiment data.
• Global: Continued tariff shock from negotiations or retaliations.

Investor sentiment remained very negative or bearish by the end of the week, consistent with the previous week. However, in the UK, sentiment improved from negative to neutral. Chinese markets were closed on Friday when the government announced retaliations against Trump's tariffs, but sentiment was already very negative by Thursday's close. This negativity is expected to turn bearish this week, likely dragging down the sentiment of Global Emerging Market investors as well.

Last week, Liberation Day turned into Liquidation Day as the last bits of risk tolerance in investors that could bend no more finally snapped, sending them running for the exit. Following the tariff announcement, risk aversion has metastasized across global markets as the talk of tariffs crossed the line between long enough and too long. In most cases, such monumental news would merit a thoughtfully orchestrated presentation, carefully constructed to minimize shock while facilitating gradual acceptance. Instead, investors were presented with a simplistic table, backed by a formula born either of desperation or an abundance of free time (trade deficit divided by imports), whose description was like a run-on Henry James sentence that made no sense, and a conclusion that sounded like a joke out of context. “You had to be there”.

There is a certain symmetry among Republican Presidents’ response to a crisis of their own making. Back on August 4, 2002, George W. Bush made the remark "Now watch this drive" right after addressing journalists about the bombings in the Middle East. On Thursday April 3, Trump left the scene of the crime Washington for his Florida properties, golfing and attending events, including a Saudi-funded golf tournament. 

Following the tariff announcement, strategists led by Bruce Kasman at JP Morgan noted that the risk of recession has surged to 60% from the previous 40%. Even billionaire Bill Hackman, a strong Trump supporter during the campaign, warned of an 'economic nuclear winter' if the tariffs were not reversed immediately. Fed Chair Jerome Powell also stated that the Fed would pause interest rate decisions until it has a clearer picture of their impact, as these effects “will be significantly larger than expected, and the same is likely true of their economic effects, which include higher inflation and slower growth”. Friday’s stronger-than-expected jobs numbers have provided the Fed with some breathing room on monetary policy decisions.

Sentiment had turned negative since mid-March already, and was decidedly bearish ahead of the tariff announcement, setting the stage for an overreaction to worse-than-expected news. Investors had expected reciprocal tariffs in the 15-to-20% range. Had the announcement on April 2^nd stopped at the universal 10% reciprocal tariffs, there most likely would have been a relief rally. Instead, investors stood in shock, staring at the tariff table in abject terror, suspended in a perfect Tarantino moment, before unleashing Armageddon.

As we head into the Q1 earnings reporting season, analysts have lowered their EPS estimates more than normal for S&P 500 companies (-4.2% vs. -3.3% on average in the past 20 quarters) and More S&P500 companies were set (as of March 31^st) to issue negative EPS guidance than average according to Factset. This was all before Tariff Gate. The tech industry is now bracing for significant disruption to their supply chain as countries, especially China, retaliate on US companies. 

More countries are expected to retaliate this week, setting the stage for even greater market volatility. Yet, investors often react like teenagers who just got their heart broken – they weep and mourn as if their world has just ended, only to be in love again inside a month.

Note: green background = bullish, red background = bearish