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Today’s Points:

• Bonds had a relief rally and so — much less impressively — have stocks.
• German bunds have fully recovered from their big March selloff.
• Strategists are still desperately marking down their targets for the year.
• Rheinmetall AG is at a new high, up 200% since the US election.
• The world’s best-performing stock exchange this year is Ghana!
• AND: More detectives, from Troubles-era Ulster to fin-de-siecle Vienna. 

The Ceasefire Holds

There is no peace in the trade conflict, but there is something that might be called a ceasefire. That permitted some degree of normality in Monday trading, with US stocks ticking up (without a full-throated relief rally), while 10-year Treasury yields looked a lot less yippy, dropping 12 basis points. But the most intriguing move came in Germany, where bund yields are back where they were on the morning of March 4:

That day, Germans awoke to the news that the two traditional big parties, the Social Democrats and Christian Democrats, had agreed to amend the constitution to allow more borrowing. After many years of voluntary austerity, the sudden decision to borrow up to an extra $900 billion, in the cause of enabling independence from the US, was stunning, and it led to the biggest one-day rise in bund yields since reunification in 1990. Somehow, amid all the sturm und drang of the last month, yields have retraced all of that epic move. The bund market is essentially telling the German government to borrow what it wants, no problem.

It’s also arguably healthy for the European economy that the tariff uncertainty hasn’t caused the bloc’s bond markets to fracture, as they did during the sovereign debt crisis a decade ago. Italy, with  most problematic credit in recent years, received an upgrade from Standard & Poor’s last Friday. That was a big fillip for Prime Minister Giorgia Meloni, and brought the yield gap between Italy and France back down toward levels unseen since before the crisis in 2010:

The market is still cautiously prepared to believe that Europe is getting its act together. The discount at which EU stocks trade to the US, measured by book or earnings multiples, hit a trough in December. The following chart uses Bloomberg’s index of the biggest 500 US stocks excluding the Magnificent Seven tech platforms:

There’s also confidence that Germany — which has now thrashed out a coalition agreement — will spend much more money on arms, primarily from domestic manufacturers. Rheinmetall AG, the country’s biggest defense company, set a new high on Monday. It has trebled since the US election, going into overdrive since Vice President JD Vance’s provocative speech at the Munich security conference on Feb. 14. The contrast with the fortunes of Tesla Inc., poster child for Trumpism and the new economy, continues to be jaw-dropping:

But will Europe really get its act together? That gets a critical test during the 90-day tariff delay that Trump decreed for negotiation. On issues of trade, the EU must negotiate as one — and it’s unlikely that even Meloni would break ranks — but it has to get its members to agree. Can it do so?

Nico Fitzroy of Signum Global Advisors warns that this will be difficult as appetite for retaliation varies widely across the bloc, with France and the European Commission the most belligerent, and others less enthusiastic. Most don’t want to use the “nuclear option” of the Anti-Coercion Instrument, adopted in 2023 with a situation just like this in mind to allow direct action against countries deemed to be economically coercive. Other options include taxing US tech groups and other services providers.  

Fitzroy described the EU response to date as “extremely restrained beyond brasher rhetoric.” Its retaliation for steel and aluminum tariffs announced by Trump on March 12 has already been postponed twice — without any signs of further retaliation for the broader tariffs the US unveiled on April 2. The new German government still hasn’t taken office, which makes it harder to thrash out a position. 

But if a retaliation strategy is difficult, striking a deal with a US administration that believes the EU has mistreated it since inception will be no easier. Peter Navarro, Trump’s trade adviser, has said that any deal must include the bloc’s value-added taxes, which would almost certainly be a step too far.  

It’s possible that US intransigence over the next three months could convince reluctant Europeans into countermeasures. But at present, it’s hard to see how the EU can agree on either a decent deal or an effective punch back. European assets might well rally further, but they’ll need to pass this test first. 

Strategic Deniability

If it might seem as though we’re spending too much time on prognosticating where the tariff conflict will go, there’s a reason. Earnings for the rest of this year, and the multiples to place on them, are critically affected by how far the tariff walls are set. Until that’s resolved, nobody much pretends to have a clue as to the stock market’s direction. There’s not much to do beyond try to work it out. 

Ben May, director of Global Macro Research at Oxford Economics, has published revised assessments of the economy to take account of the concessions announced last week by the White House. But he said:

The new tariff assumptions in our forecast are slightly more severe than President Donald Trump’s campaign pledge to raise the tariff on China to 60% and to 10% for the rest of the world. Indeed, the new tariff regime is close to what many would have considered a worst-case scenario as recently as March.

He added that the last week has done nothing to resolve uncertainty. And as for Wall Street equity strategists, most assumed tariffs somewhat below this scenario, borrowing from the lesson from Trump’s first term that he dislikes antagonizing the stock market. That has forced them into desperate revisions of their forecasts, but they still implicitly expect a big rise. This is how the average year-end estimate for the S&P 500 has moved over time, as compiled by Bloomberg colleagues: 

A breakdown of all the strategists contacted by colleague Jess Menton for her great piece on Wall Street’s tariff confusion shows some steep cuts — but all bar two of them still expect a gain for the rest of the year:

Perhaps the best indication of the Street’s confusion that Jess provides comes in this analysis of the total spread between highest and lowest forecast for the S&P. Since Bloomberg started collecting the data in 2000, they have never been so dispersed this late in the year:

Earnings season will reveal a lot of information to help the equity market. It always does. But until there’s some measure of certainty over whether the US is really going to press ahead with the toughest tariff regime in a century, index targets are going to involve even more guesswork than usual. So, unfortunately, we all need to brace for much more theorizing and speculating about what’s in the mind of Tariff Man.

Letter From Accra

Points of Return reporter Richard Abbey is in his native Ghana, home of the world’s best performing stock market this year, up 17% in dollar terms. This is his report: 

World capital markets’ positive reaction to the latest Trump backtrack on tariffs shows just how badly investors needed a breather. Uncertainty is not over, by any measure, but at least they have a moment to recover from palpitations. But a few places don’t need a breather, because they’ve escaped unscathed. As equities in developed and emerging markets tanked on Washington’s attempt to reshape global trade, the Ghana Stock Exchange has been unstoppable – emerging as the best performer among all the indexes tracked by Bloomberg:

On Election Day, it now turns out that shorting the S&P 500 and putting it into the GSE index would have been fabulously successful, netting almost 50% in dollar terms:

Why? Comparatively, Trump’s initial 10% tariff on Ghana’s exports was a let-off. Others in the region fared worse. More importantly, Liberation Day and its buildup made little dent in the stock market, which is dominated by companies with little exposure to the US. But it’s still surprising that Ghana is logging such superior performance. Much of it, if not all, is related to the recovery of financial stocks from the government’s painful sovereign debt restructuring while the economy undergoes an International Monetary Fund fiscal support program. 

Quoted banks held about 34% of all domestic debts, with coupons averaging about 19% that were slashed to about 9% during the 2022 negotiations. As a result, investors priced in significant stress on the financial sector’s shares, as this put pressure on their liquidity, profitability, and solvency — a potentially deadly combination. In the years that followed, the central bank lowered its capital adequacy ratio to 10%, giving banks up to the end this year to meet the 13% benchmark. The central bank now says many banks are in line to exceed this requirement.

As banks turned the corner, they also produced earnings that demonstrated recovering profitability. That led investors to pile in to financial stocks. This is how that subset compares with the overall Ghana Stock Exchange composite index:

With tariffs having little impact, the ongoing rally will likely continue. It also helps that a recent brutal dose of inflation appears to be easing as the central bank hikes rates. Accra-based Databank Group’s Evelyn Lavie argues that fast-moving consumer goods sectors are set to complement the financials’ strong performance as price rises show signs of coming under control:

Subsidiaries of listed multinationals, including Unilever, Fan Milk, and Diageo Plc’s Guinness breweries are expected to lead the charge, supported by stronger earnings growth and as the new administration of President John Mahama, who took office in January, attempts to move from budget deficit to surplus. 

Survival Tips

To learn about different corners of the world, detective fiction is the perfect guide. Readers have recommended to me: Ace Atkins’ Quinn Colson series, starring a former Army Ranger in Mississippi; Petros Markaris’ series on Kostas Charitos, an eccentric Athenian detective, Leif G.W. Persson’s Fall of the Welfare State trilogy in the period following the assassination of Swedish Prime Minister Olof Palme; Elizabeth George’s Thomas Lynley books, set in London and written in the Pacific Northwest; John Sandford’s Prey series in Minnesota; Louise Penny’s series on Quebecois detective Armand Gamache; Deon Meyer’s novels, originally written in Afrikaans, about Cape Town detective Benny Griessel; Martin Cruz Smith’s series featuring Arkady Renko, a Moscow homicide detective with a Parkinson’s diagnosis, working amid the fall of the Soviet Union; Adrian McKinty’s Sean Duffy series, set in Ulster during the Troubles; Batya Gur’s Michael Ohayon series about an Israeli detective in Jerusalem; Frank Tallis’s Liebermann Papers series on a psychoanalytical investigator in turn-of-the-century Vienna (and written by a practising clinical psychologist); and Jean-Claude Izzo’s Marseilles trilogy, which is both a love letter to the city and an exposé of its seamy underside — start with Total Chaos. 

I will wrap up the detectives tomorrow. Any more out there? 

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