Market 04/09: Trump Delays Tariffs 90 Days

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Trump temporarily delays tariffs 90 days, all except China

• This morning China retaliates by imposing 84% tariffs on all US imports

• Trump announces:

• Retaliate 125% on all Chinese imports

• Temporarily suspend tariffs on all other countries and negotiate reciprocal tariffs within 90 days, only impose basic 10% tariff.

• Canada and Europe, even though they retaliate, will only be imposed 10%

• Bessent will meet and talk with Vietnam, Japan, India, and Korea today

→ Seems like this group will reach an agreement first

Currently:

• China tariffs US 84% and US tariffs China 125% → Trade between the two countries will certainly go to 0

• China has devalued the Yuan though not much yet, but now if not devalue, how can it compete with other small countries like Vietnam on exports?

  • Trump will surely close all loopholes for transshipping goods through third countries

→ If continue to devalue Yuan, China will face capital flight risk (money fleeing)

• China's last market is Europe, but Europe is a place that extremely likes to impose tariffs even more than the US to protect the market

→ China is really pushed into a difficult position

NASDAQ up 11% after news, strongest since 2008

This morning Trump wrote “this is a good time to buy”

And now:

When the second fake news about Trump delaying 90 days all except China, Steve commented that the strong market increase likely gave Trump the idea to do that.

US Bonds sold off - Basis Trade broken?

What is Basis Trade?

• Long actual bonds

• Short bond futures

Bond futures are promises to buy bonds at a point in the future

Bond futures prices are always higher than actual bond prices, because it requires less money to own than actual bonds. (1 is the product, and 1 is the promise to buy the product)

Example:

• Buy 10-year bond at 98.50

• Short 10-year bond future at 99

At expiration, the prices of these two products must be equal

→ Profit $0.5 however this is very small profit → must use leverage

And this trade is almost 100% win so the issue is just enough profit over time:

Treasury estimates Basis Trade of US hedgefunds at around 20x

Large funds:

Money mainly borrowed from FED through repo system (overnight loans)

Simply put:

• The borrowing rate from FED just needs to be less than 20x the spread between bonds and bond futures to make profit

China selling bonds in the past 2 days created a panic in the market, bond prices dropped too fast but futures prices couldn't keep up

→ Short side can't cover the long side

→ Japanese investment funds exit first

When exiting the trade, it will be the opposite:

• Sell bonds / Long bond futures → Makes the spread even wider

→ The later the funds are launched, the more they lose

Created a big sell-off last night with 10Y bond yield pushing through 4.5% and 30Y through 5%

With extremely high liquidity demand in the overnight borrowing market at FED → pushing overnight rates higher → making basis trade lose more

This has happened most recently in summer 2020 and 2019 before, both times FED had to intervene.

• Last night BoJ intervened and held an emergency meeting (action unclear)

• FED may have done stealth QE, coordinating with BoJ (i.e., pumping money to buy bonds but not saying who) → Will be seen on Balance Sheet report tomorrow night.

Overall, this is an extremely dangerous event that FED, even Trump/Bessent cannot ignore. Whether China did it intentionally or unintentionally, they have touched a time bomb that Bessent should have resolved before the trade war.

→ Responsibility also lies with Powell as FED knew about the size of Basis Trade but did nothing.

FED needs to prepare bailout measures for hedge funds participating in basis trade - 2 weeks ago

Not ruling out the possibility that this is the real reason Trump had to pause tariffs today to stabilize the bond market in the short term and give hedge funds time to deleverage.

Demand for 10-year bonds from foreign investors surges

After yesterday's extremely poor $58 billion 3-year bond auction, today's session is surprisingly good

• Yield at 4.435% below 4.465% pre-session, best since 6/2021

• Bid-to-cover 2.665 from 2.588 last session, highest since December

• Foreigners take 87.9% up from 67.4% last session, highest in history

• Domestics turn away buying only 1.4% from 19.5%, 3rd lowest in history

• Dealers take back only 10.7% from 13.1% last month

→ Overall, no matter what anyone says, US bonds and USD remain the safest haven.

FOMC Minutes: Still many risks, support slowing QT

• All agree to keep interest rates

• Policy still has many uncertainties

• Risks of inflation longer than previously expected

• Almost all agree to slow down QT process

• Full-year GDP growth may be weaker than January forecast

→ Almost nothing new in March FOMC Minutes

Shorts-squeeze occurring across the market, SPX +8%

$4000 billion added to the market day after Trump announced:

Buying force almost too strong, stocks continuously halt up with buy volume leading sell peak 40-1 on internal. VIX breaks hard -30%

→ This is not a shorts-cover rally but a shorts-squeeze

Nothing too technical about today's move. Market only expecting one thing: Trump pausing trade war, with investors having 'teased' the reaction 2 days ago when fake news came out.

With the biggest risk gone, or paused 90 days, remaining risk is only China devaluing Yuan further (unlikely), so it seems we've at least passed the dangerous phase.

Structurally, with SPX holding above 5000 as mentioned in yesterday's article, huge put volume will be covered creating almost no overhead.

Congratulations to readers/investors who stayed firm during the recent period. Steve hopes his analyses have helped everyone somewhat.

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