The Two Easter Weeks That Will Be (13th April 2025)

Never before have we fielded so many questions over a weekend. If you’ve been making money, you’re concerned market volatility could throw a spanner into the works. If you’ve lost money, you have either exited your position or added a hedge. If you’ve done nothing, you are wondering if you should. In short, you want to know what is going to happen next. 

More volatility is the short answer. We are not out of the woods on the negative gamma picture for the S&P500 and the volatility we have had to date will now be reflected in value-at-risk models throughout the market. Positions simply cannot be held in the same size. De-leveraging is the name of the game. Norinchukin, one of the largest banks in Japan, already admitted losses in February of $12.6bn due to its huge overseas bond portfolio (which it already said it would be unwinding last summer). FOX Business journalist Charlie Gasparino hinted it was Japanese bond investors selling US Treasuries that drove Trump to announce the 90 day pause. 

Liquidity is drying up. That would have already been the case as we head into these two shortened Easter weeks but it will be at even more of a premium in a world where investors are finally realising perma-liquidity FOMO BTD is over. This is why we are seeing bigger moves in FX markets as people search for liquidity wherever they can. Rather than attempt to hedge the currency risk on overseas investments, it becomes easier to get rid of the underlying exposure altogether and exit the currency.

This has been portrayed as investors bailing out of the US because of ‘a lunatic in charge destroying the rule-of-law reputation of the US’. We have yet to hear that from any of you. Exposure to the US was huge given the size of the market, its relative growth story, its AI tech stocks and its attractive yield. Cutting exposure necessarily means bond and equity prices falling alongside the currency. But markets are as prone to a narrative as anyone, even one peddled by those for whom it confirms their political priors, and it could become the story if longer-term investors decide that it makes sense for their portfolios. 

Of all the breathtaking statistics of the past two weeks – from the biggest five-day move in 10y US v Germany spreads, the biggest weekly increase in the US 30yr yield for four decades, the biggest one day drop in the VIX ever, to record volumes in SOFR, TLT and HYG – the most significant is what took place in the SPY. This is the original ETF, created in 1993 to track the S&P500. Simple stuff. Deeply liquid with $ 575bn in assets. And yet on Wednesday 9th April on the day that Trump announced the 90 day pause, it hit the highest premium to its Net Asset Value since 2008 (see middle panel):

This is an ETF where the tracking error usually barely registers more than a fraction of a basis point. On Wednesday it hit 90bps. Even more strangely, the VOO, which is Vanguard’s version of the same product, hit one of its biggest discounts for years at -12bps. This didn’t even happen in the depths of the pandemic in 2020. 

So two of the largest ETFs in the world that track the largest market in the world, a liquid product tracking a liquid market, failed to keep track with their underlying. This is a sign of severe stress. It will be maxing out the capabilities of market makers like Jane Street, who employ the top quants on big salaries and reserve money for tail risk liquidity events so that they can make markets even when others can’t. One of the company’s founders told the FT in 2021 “we think of ourselves as mainly built for crises” and one of its traders said “Our basic service, standing ready to buy and sell ETFs, options and bonds, is even more critical in times of stress. Because we bought all that extra protection we didn’t have to worry about the extreme moves, and were prepared to provide liquidity in an outsized way“. The same article revealed that the firm spent up to $75m on put options so it is not surprising that Friday 4th April saw record volumes in HYG Puts. 

But can all the quants in the world cope with a combination of political risk and hugely crowded positions all rushing for the exit door? The experience of LTCM would suggest otherwise. 

Given such violent moves in such a short space of time there will be a forlorn hope that the world will now calm down. But the political risk will continue apace. Trump has the eyes of the world on him and he is hardly going to stop now that he believes he has the advantage. There will be sectoral tariffs. There will be deals. There will be exemptions. There will be delays. Then there will be the actions of actors beyond the White House: the EU in particular have a decision to make about where their future lies. They will have to invoke anti-dumping measures on China even as they realise they are outside of the US defence umbrella where tariffs are part of the price of admission. When they do, it will remove the disinflationary impulse created by China cutting prices to push its over capacity onto other countries. (Click here to see our CEO Helen Thomas talk about the global impact of tariffs on Channel 4 news).

So when the ECB meet on Thursday this will be an ideal opportunity for them to cut rates to get ahead of the uncertainty. The drop in the oil price in Euros means that it has fallen ~20% below the latest staff projections. The governor of the Greek Central Bank told the FT that “tariffs are definitely a deflationary measure“. The only question is whether the level of financial instability and fears of a demand shock lead them to cut by 50bp. The hawks will prevent this, absent a more severe bout of financial instability.

Almost all other data is becoming irrelevant given it is in the rear view mirror, aside from:

• China GDP, IP and Retail Sales on Wednesday – although this data can be massaged, it will still provide clues for whether the Chinese economy remains stuck in slow growth
• US Retail Sales on Wednesday – just how resilient was the US Consumer before the tariffs kick in?
• UK PSNBR on Wednesday 23 April – this will affect how much extra borrowing is required by the government; if it’s significantly more, the timing of this release will be unhelpful for market liquidity with bonds remaining under pressure
• To this end, Gilt auctions on Tuesday and Thursday 24 April and the US 20yr Treasury auction on Wednesday will demonstrate whether investor appetite remains for the glut of bond issuance coming from high deficit countries in the face of lower growth and higher inflation
• Policymakers will have their chance to get together the week after Easter with the IMF/World Bank Spring Meetings taking place from Easter Monday until Saturday 26 April. If there is to be a coordinated central bank response of any description then this is the place to have that discussion
• The BOE’s Pill, Bailey and Breeden speak on Wednesday 23 April, followed by Lombardelli on Thursday 24 April and Greene on Friday 25 April.   

In reality there is really only one central banker that matters when it comes to global financial stability and the global economy: step forward Jerome Powell who will be speaking Wednesday on the “Economic Outlook” at the Economic Club of Chicago. So far he has tried to sit things out other than commenting ‘While tariffs are highly likely to generate at least a temporary rise in inflation, it is also possible that the effects could be more persistent‘.

But it’s unlikely he will be able to sit this out much longer. The four trading days up to and including 8th April saw the S&P500 trade in a range of more than 5%. As Joe Weisenthal pointed out, this has only happened on three other occasions: 1987, 2008 and 2020. Realised volatility in the SPY is now higher than realised volatility in Bitcoin:

But the Fed Put ain’t what it once was. Sources told Reuters at the end of March that ‘Some European central banking and supervisory officials are questioning whether they can still rely on the U.S. Federal Reserve to provide dollar funding in times of market stress’. Astonishing not only for the discussion but also that it has been made public. And Trump has his own designs for the Fed. Two days after the tariff announcement he put on Truth Social “CUT INTEREST RATES, JEROME, AND STOP PLAYING POLITICS!”. Bloomberg flagged up the constitutional risk to Powell’s position with Trump having asked the Supreme Court to let him fire the top officials at two agencies: 

‘The case is testing a 1935 Supreme Court ruling that let Congress shield high-ranking officials from being fired, paving the way for the independent agencies that now proliferate across the US government. The legal wrangling ultimately could test whether Trump has the power to fire Federal Reserve Chair Jerome Powell.’

This does not bode well for a reduction in financial market volatility. We are also entering earnings season where we will be watching out for guidance issued by companies in the face of the tariffs, the uncertainty, and new policies such as the proposed increase in fees for Chinese vessels docking at US ports. We will hear from:

• Louis Vuitton on Monday
• Rio Tinto on Tuesday
• TSMC, Netflix and L’Oreal on Thursday
• Tesla on Tuesday 22 April
• IBM on Wednesday 23 April
• Procter and Gamble on Thursday 24 April

The political volatility has at least forced Germany to put together its government at speed. The CDU/CSU and SPD have announced their coalition deal which includes:

• Reduced corporation tax 
• Lower electricity prices
• Reduced VAT on restaurant food
• Increased minimum wage
• Tighter immigration rules
• And of course the commission to loosen the debt brake

Merz is likely to be formally selected as Chancellor in the week after 28th April, which is the day when the CDU holds a small party conference to accept the coalition programme. Merz spoke in English at the press conference delivering the coalition agreement to say ‘A key message to Donald Trump is, Germany is back on track’. On the same day, a poll showed AfD in the lead for the first time. Merz has taken a gamble by busting debt limits and pushing it through the old parliament in the wake of the election result. This will have long term ramifications.

And finally, the UK government recalled Parliament on a Saturday, the week before Easter and two and a half weeks before local elections, in order to take control of British Steel. This isn’t just about saving jobs – it is also about national security. On the morning of the vote, British Steel workers prevented Chinese executives from entering the plant and Humberside police were called following reports of a suspected breach of the peace. Suffice to say, this is not normal corporate behaviour. The Business Secretary made it clear the Chinese owners were not acting “in good faith”, telling Parliament “it became clear that the intention of Jingye was to refuse to purchase sufficient raw material to keep the blast furnaces running, in fact, their intention was to cancel and refuse to pay for existing orders. The company would therefore have irrevocably and unilaterally closed down primary steel making at British Steel.” This would have left the UK as the only G7 nation without steel making capabilities. The Business Secretary later told Sky News that there is now a “high trust bar” to bringing Chinese investment to the UK, at least for certain industries.

We are moving from Trade War to Currency War to Economic War. Financial markets must therefore reflect this in asset prices and in volatility. Happy Easter!!