A New World 2

The macro point

In the bond segment, liquidity is at its lowest. For example, for 'off-the-run' corporate bonds (generally issued some time ago), it is at its March 2020 level – at the time of the first global lockdown. For recent liquid bonds (issued less than a year ago), the situation is better with tight spreads. However, the high yield market (companies with a higher default risk) is frozen on both sides of the Atlantic. Liquidity is also very low in stocks. For Forex, it is different even though there are times during the day when it decreases drastically. We are clearly facing financial markets that are not functioning normally.

Significant improvement is unlikely as long as the trade war is at its peak. In this regard, close attention should be paid to the negotiations between Japan and the United States. The Japanese archipelago serves as a guinea pig for the rest of the world. It has been the largest foreign investor in the United States for five years and one of the main holders of American Treasury bonds, amounting to $1100 billion. Yet, it is subject to tariffs of 25% for the automotive industry and 24% for other sectors. A previous agreement was signed in 2019 between Tokyo and Washington that eased restrictions on American agricultural products. The situation is more complex today as the White House also wants to include the yen's exchange rate in negotiations. It will be a test for other countries also subject to American protectionism.

Pending a potential agreement between Japan and the United States, markets, including currencies, are expected to remain volatile and erratic. Distrust of the dollar is likely to continue, benefiting the Swiss franc and the euro. This is certainly the first crisis where the euro plays a safe haven role. It is still too early to know if this is sustainable.

American protectionism is also causing significant disruptions in international trade. The US administration's tariffs on Chinese products are causing a sharp slowdown in transpacific trade: container bookings between China and the United States have fallen by 25% according to SONAR Container Atlas data. This new reality has already claimed a victim: Vasi, a Singaporean container operator, has gone bankrupt. This could eventually affect trade across the Atlantic as well. A logistics shockwave is occurring with potential inflationary consequences on maritime freight costs... and thus for the final consumer. This is an element to watch closely in the coming weeks as it could pose a serious headache for many companies.

Finally, the exchange rate risk must also be mentioned. For 2025, many corporate treasurers had a target of 1.15 for the EUR/USD. It could be exceeded. The options market, which remains a relevant indicator, estimates that the pair could quickly cross the 1.20 threshold. This is a lot of accumulating problems for companies exposed internationally.

Technical point

In the foreign exchange market, the European Central Bank meeting was the main focus last week. Unsurprisingly, it lowered its key rate by 25 basis points, refraining from committing to further rate cuts. The impact on EUR pairs was marginal. Everything had already been priced in for several weeks. Distrust of the U.S. dollar remains high. It is now a long-term trend in the foreign exchange market. This is due to three main factors: 1) investors, particularly institutional ones, wanting to reduce their exposure to dollar-denominated assets, whether in stocks or bonds; 2) concerns about the U.S. economic cycle, especially fears of recession, and 3) a European fiscal policy that seems more accommodative, notably due to the German stimulus. All this leads to a structural decline of the dollar, particularly against the euro. As for the British pound, good resilience is observed even if volatility remains high on EUR/GBP. Due to the confirmed drop in British inflation last week, we are now certain that the Bank of England will lower its key rate by 25 basis points next month. Again, this is now priced in the market.

Announcements to follow

This week is likely to be very hectic, unsurprisingly.

The good news is that there is virtually nothing on the economic agenda. However, as has been the habit since the beginning of February, the numerous surges from the White House need to be managed.

The information presented in this publication is provided purely for informational purposes and does not constitute investment advice, or an offer to sell, or a solicitation to buy, and should not under any circumstances serve as a basis or be considered as an incentive to engage in any investment.