Devon Funds Morning Note - 09 April 2025

Wednesday 9th April 2025

Chicken run

Global

Investors initially bought the dip on Tuesday, with the S&P500 leaping over 3% early in the session. However, the rebound could not be sustained, with the indices falling into the close, weighed by the technology sector. The Dow closed down 0.8% while the Nasdaq dropped 2.2% and the S&P500 fell 1.6%, going below 5000 for the first time since April last year. The small-cap Russell 2000 was in positive territory before ending down 2.7%. With tariffs set to go into effect shortly, the optimism over “deals” potentially being made by the US with its many trading partners, was offset by news that Trump is pushing ahead with 104% duties on many Chinese goods. Commodities were also volatile, led by WTI oil which was up at one point before falling 4% to ~US$58 a barrel. Bond yields were volatile – the US 10-year jumped 11 points to 4.29%.

The US will start collecting country-specific tariffs from 86 trading partners in a few hours’ time. As the US and its trading partners enter negotiations, the notion that the tariffs announced last week will prove to be maximum and a worst-case scenario, continues to have credence. Japan has already entered talks, and Trump posted on social media that he had a “great call” with the acting president of South Korea. Treasury Secretary Scott Bessent also said that around 70 countries had approached the U.S. for tariff negotiations.

China is though not on that list. Trump has claimed that China “wants to make a deal” and he was “waiting for the call.” He added that “it will happen.” Beijing has meanwhile vowed it will “fight to the end.” While negotiations with other trading partners are encouraging, a deal with China remains a big sticking point for markets. Last year US bilateral trade with China was US$582 billion, more than double that with Japan (US$228 billion), and triple that of South Korea (US$197 billion). Premier Li Qiang has said his country has ample policy tools to “fully offset” any negative external shocks and has reiterated his optimism about the growth of the world’s second-largest economy in 2025.

Time will tell who will waver first in what appears to be a game of “chicken” between the US and China, with many other countries already having blinked. China only sends around 15% of its exports to the US, so arguably can divert them elsewhere. Goldman Sachs has estimated that Trump’s threat of an additional 50% tariff on China’s goods would have only an incremental impact on China’s GDP growth. The investment bank sees the initial 50% tariff as reducing Chinese GDP by 1.5 percentage points, but a second 50% tariff would reduce GDP by a lesser 0.9 percentage points.”

The idea that the US risks being isolated by its war on trading partners also remains a prospect. Qiang and EC President Ursula von der Leyen were said to have held “constructive” talks today on a possible mechanism for “trade diversion” in the wake of the sweeping tariffs announced by the world’s largest economy. The statement read it is “the responsibility of Europe and China, as two of world’s largest markets, to support a strong reformed trading system, free, fair and founded on a level playing field.”

The US will also have to face up to the reality that, Apple, one of its largest companies (now the second most valuable behind Microsoft, after falling 20% in the last four trading sessions) will not be able to easily relocate manufacturing from China to America. The White House’s 27-year old Press Secretary claimed overnight that iPhones can “easily” be made in the US. It has however been estimated by experts that even moving 10% of Apple’s supply chain to the US would take at least three years and cost US$30 billion. It is also clear that iPhones could not be made for anywhere near the same cost, so Americans would have to pay up for them – the tariffs are already set to deliver a price increase of around 30%, and this will potentially rise.

With tariffs on Apple’s wares set to double it is no surprise there has been “the spending splurge” reminiscent of the pandemic for iPhones (sales through Apple’s stores and website rose about 6% in March), along with lots of other things, ranging from cars to olive oil, toothpaste and other staples (toilet paper not so much this time around).

Tariffs are meanwhile seeing companies pause on spending that takes much longer to implement. There are reports that data centre developers for one are re-evaluating their projects, with the prospect of rising costs across the supply chain needed to ultimately deploy AI. Not quite the splurge in investment by corporates Trump has heralded.

Meanwhile, the pressure continues to grow around the President for a reversal on trade policy from those in his inner circle. Elon Musk has called for a rethink and has continued a feud with Trump’s trade advisor Peter Navarro, who is an ardent supporter of the tariffs. Musk wrote on X that “Navarro is truly a moron.”

Political pressure is also growing. A bipartisan bill that would rein in Trump’s tariff powers by giving Congress a final say over whether his duties can remain in effect has been introduced to the House, mirroring a similar Senate Bill. The House legislation, dubbed The Trade Review Act of 2025, requires Trump to give Congress 48 hours’ notice before imposing or increasing tariffs, along with an explanation and an impact assessment. The legislature also allows Congress to end a tariff early via joint resolution.

The U.S. Trade Representative has meanwhile had to front the Senate Finance Committee at Capitol Hill. It was an intense session, with lots of questions. Senators drilled down on the intent of the tariffs, with one saying “There is no clear message about how tariffs were determined, what they’re supposed to accomplish, how long they will be in place, whether they’re a negotiating tool or a move to try and cut the United States off from global trade and usher in a new era of 1870s-style protectionism.’’

Another senator stated, “Donald Trump’s aimless, chaotic tariff spree has proven beyond a doubt that Congress has given far too much of its constitutional power over international trade to the executive branch.” It seems that lawmakers — including some Republicans — are suggesting that Congress needs to reassert its authority over trade. Stay tuned.

Political pressure will also only grow as the stock market remains volatile and as assessments of the outlook for the US continue to diminish. Former Treasury Secretary Larry Summers has warned that the US is now likely headed toward a recession, with potentially 2 million Americans put out of work. Chicago Fed President Austan Goolsbee has meanwhile said that tariffs are a negative supply shock and businesses won’t invest as much amid the uncertainty.

There were some stocks and sectors which remained in the green at the close. The banking sector was up 5% at one point, but JP Morgan still finished 1.1% higher. United Health rallied 5.4% after the Centers for Medicare and Medicaid Services announced a higher-than-expected hike for government payments to Medicare Advantage plans. Broadcom rose after the chipmaker announced a US$10 billion share repurchase program.

Coal manufacturers were also the up as the US Energy Secretary said the commodity has a central role to play in meeting growing electricity demand in the U.S. Donald Trump is poised to sign an order that aims to support U.S. coal production. Trump stated on Monday that coal is clean and claimed (falsely) that Germany is building one new coal plant every week and China is building two a week. Another volatile stock was Levi Strauss. The jeans maker initially surged over 10% on its result, and after maintaining guidance. The shares closed down 8%. Levi’s manufactures some of its products in countries like Cambodia and Vietnam, which will face 49% and 46% tariffs, respectively.

Across the Atlantic, the STOXX50 jumped 2.5%. Defence stocks rebounded. The FTSE100 rallied 2.7% with Rolls Royce and British Airways owner IAG jumping 5%. Johnnie Walker maker Diageo rallied 3% as it emerged the EU has exempted whiskey, wine and dairy products from its 25% retaliatory tariffs on U.S. goods. The UK is relatively insulated in any case with US tariffs - UK goods exports to the US accounted for less than 2% of GDP, with the new 10% tariff rate representing the lower end of the spectrum.

In Asia, the Nikkei staged a huge rebound, leaping 6%. Shares in Nippon Steel jumped by a similar amount on news that Trump had reopened a review of its proposed takeover of US Steel. The Hang Seng jumped 1.5% and the CSI300 in China was 1.7% higher. China’s central bank has pledged to back state-owned fund Central Huijin Investment to stabilise markets.

New Zealand

The Kiwi market staged a big rebound on Tuesday, with the NZX50 closing up 0.98% at 11,891. Fisher & Paykel Healthcare rose 10 cents, while Infratil, Spark, and a2 Milk were all up 2% or more. Fletcher Building rallied 3.4%. Summerset was 2% higher following its update (see yesterday’s note).

It is the RBNZ meeting today. Most commentators have predictably “called” for a 0.25% rate cut. This was already flagged by the RBNZ back in February, however, the world has changed drastically since then. There is also a new Governor in charge - Christian Hawkesby has been appointed for an initial period of six months.

The RBNZ, probably won’t but SHOULD cut rates by at least 0.5% (and for the third meeting in succession).

The OCR is currently at 3.75%. The assessment of the neutral rate where the economy is neither being stimulated nor constricted is below 3%. We should arguably be there now.

Inflation is already at the bottom of the central bank’s target. We have had another deflationary shock – oil prices are down 20% over the past month. Tariffs are in place, but major US trading partners already look to be in negotiation mode and are offering to move these towards zero in some instances. China, our largest trading partner, looks to have had its wings of growth clipped.

Our economy is arguably only crawling out of recession, and confidence by many metrics is very low in historical terms. Dairy is doing well, but pretty much every other sector is struggling.

The NZ Institute of Economic Research’s Quarterly Survey of Business Opinion showed that business confidence lifted in the March quarter, but was largely in response to OCR cuts and before last week’s announcement in the US. A net 23% of firms expect general economic conditions to improve over the coming months on a seasonally adjusted basis, up from the net 9% in the previous quarter. Measures of firms’ trading activity however continued to indicate that demand is weak. With a net 21% of firms reporting a decline in activity in their own business.

Unemployment is rising and things are going to get worse. The report showed that a net 17% of firms reduced staff in the March quarter. Firms are planning to reduce investment in buildings, plant and machinery.

Cost pressures remain (the weak currency will be a factor), but the proportion of firms that raised prices in the quarter (8%) is at historic lows. The currency aside, inflationary pressures are continuing to ease against the backdrop of easing capacity pressures.

The RBNZ needs to get ahead of the prospective deflationary shocks unleashed by Trump. Prices of many goods may still go up for Americans but goods previously destined for the US could be diverted to other parts of the globe, including Asia, at lower prices.

We are amidst another economic shock and the RBNZ has a track record of reacting faster than most central banks.

The Kiwi market opened down ~0.5% - a signal to the RBNZ? Let’s see.

Australia

The Australian market staged a strong rebound on Tuesday, with the ASX200 rallying 2.3% to 7,510. It was the largest gain for the benchmark since 2022 and recouped some of Monday’s fall due to China’s retaliatory measures. All 11 sectors finished higher, with energy, mining and technology rebounding strongly. Santos jumped 5.4%, and Whitehaven Coal soared 8.7%. BHP rose 2.3% and CBA was up 2.8%.

On the stock front, hearing implant maker Cochlear said it expects to be exempt from Donald Trump’s tariffs under an existing duty-free arrangement on its imports into the United States. Mexican-themed Guzman y Gomez says it is on track to pay its maiden dividend as global network sales increased by 26.3% to $A289.5 million om the third quarter, led by its Australian stores. The burrito chain has continued to open restaurants in Australia and the US.

The ASX has opened 1.6% lower today.

Comment

It remains a very volatile time for markets, one that requires “cool heads,” particularly given the lessons of history. On the 12 occasions since 1945 when the S&P 500 fell by 20% from its peak, it has rebounded strongly in the year following. This was also in evidence during the pandemic, when the broader index soared 70% after the initial Covid market shock. The increasing emergence of trade negotiations, compelled by the interests of economic and political self-preservation, could yet be a key stabilising factor for markets this time around.

Comments from our readers

No comments yet