After a bout of who goes first in the Sino/US tariff negotiations, if indeed they are a thing, the continued standoff is starting to cause as much unease as threats of multiple percentage levies drawn against each other. Equities have stuttered after a very decent recovery, but because of trade war fears, the overnight disappointing earnings from Super Micro Computers is harrying bearish notions that such a diminished performance will see its equal in Microsoft and Meta when they too release their first quarter results. This is added to a day which saw soft data worries in the US continue with the Conference Board’s US Consumer Confidence Index falling 7.9 points to 86.0 in April, a fifth consecutive fall to read at the lowest level since May 2020. A people’s expectation always drives quantitative data, and this is proven in the job space. The Job Openings and Labor Turnover Survey (JOLTS) missed an expectation of 7.5 million to come in at 7.14 million. While not as important as the Non-Farm Payrolls due Friday, markets will take the lower reading as a possible indicator to the state of overall employment. President Trump huffed and puffed in his victorious 100-day speech last night and told Americans that they had never had it so good, data is debating his blowhard tendency.

As for our market, it is starting to not like itself again. Yesterday, began with a scuttling of backwardation in Dubai Crude, the unease spread to the European marker and the strength in Brent, so prevalent and inspired by some eye watering dated trades, was suddenly faced with expiry doubt and evacuation. Being the one thing that has held prices, depleted structure pulled the flat price lower in adjustment and the bearish drivers that have not changed very much suddenly found greater emphasis. The very real possibility that OPEC+ will continue to bring extra barrels to the market as it fights to keep order within its ranks is added to the diplomatic thrusts in Ukraine and Iran which if successful means more international crude on the water at a time when a trade war will squash any hope of demand growth. China is an exercise in such warning and although the private Caixin Manufacturing PMI showed slight expansion at 50.4, the official National Bureau of Statistics reading for April this morning is 49.0 and with Non-Manufacturing and Composite at 50.4 and 50.2 respectively, the spate of Chinese buying in crude can only be tariff front running, for industrial activity does not give reason for oil demand. Overnight the US API data shows a 3.8mb build in Crude inventory with a 2.5mb draw in Distillate and a 3.1mb draw in Gasoline. Ordinarily, the product draws would be hope for demand, but the Crude build will stifle and be added to the current reasons to be negative.

Do not be blindsided by US earnings

Yesterday we debated that much of the worst has been done in market reaction to the topsy-turvy world that is tariffs. Yet, that does not mean it is time to enter the fray with refreshed confidence that being long stock markets and other assets would always be underpinned by US exceptionalism bought about by a fascination in AI and those who manufacture or peddle bots of the future. The influential Dallas Fed survey would have that the pain from a protracted global trade war has only just begun and where and when the carnage settles remains a mystery. President Trump’s insistence on negotiating the current complex global trading system with a 1930s tariff map had one anonymous business leader within the Dallas overview chiding on how the tariff policy is "a self-inflicted pandemic." Texas saw manufacturing shrink, work weeks shortened with a possible lightening in staff and consumer sentiment took an ill turn. The cost to Texas if tariffs on Canada and Mexico become real, rather than bargaining gambits, would run to tens of billions of dollars. A business activity gauge fell to the lowest reading since 2020 with lower new orders and new shipments being placed directly at the foot of tariffs. Nearly all participants said that any increases in business costs would be passed to consumers. Texas is responsible for ten percent of US manufacturing and how increased costs and declining outlook is snapshot into what might be seen across the US.

For all the doom that lurks on every click bait corner, what is very interesting at present, and defying the Lone Star State’s situation, is how the US S&P price to earnings ratio, or how companies are valued, is probably still indicating a degree of confidence within US investors. While it has backed off from how would-be corporate raiders or mergers and acquisition expansion need pay 26.1 times over earnings, and using data from World PE Ratio, the P/E ratio has only drifted to 25.25 even after the dramatic fallout of US stock market indices. Indeed, the All-World ratio has declined by a similar amount meaning the premium of 20-25% commanded by US companies over global counterparts remains. Such pricing does not chime in with the many warnings of recession that have recently danced across the pages of media opinion. It might just need a succession of poor hard data to finally break the residual optimism, but as it stands the P/E ratio is currently backed up by earnings per share ratio (EPS). With nearly three-quarters of S&P 500 companies having reported, some analysts are predicting that EPS will show growth of 10.1% in the first quarter 2025 which will be a successive quarter of double-digit earnings increases. With the monsters of Amazon, Microsoft, Apple and Meta reporting this week, and barring anything rogue in their readings, the recent bounce back in US bourses is not without merit.

However, so much of the success has been about the beginning of the year’s Trump bump and the promises of deregulation and lower taxes. Reality dawns, and these encouraging first quarter readings might be very different when re-addressed at the end of July. PMIs and inflation suggest the US is contracting and stagnating, China cannot kick deflation, and Europe remains all but a basket case. There is a gaping maw developing between what P/E and EPS ratios indicate and what might happen in the event of a recession. Even the high-flying darling Nvidia has redressed its P/E ratio to a six-year low and might just be a signal for a wider start of things to come, for 20% is where forward forecasting is being set. This of course is all speculative, a recession is not nailed on in the US and its root cause, tariffs, are a moveable feast. Market pricing is the most useful tool in policing the excesses of Trump’s tariff venture and a redress of US corporate valuations has been long overdue. It is doubtful there will be a reset, recession and rout. The President might be able to get away with a little more inflation, some higher unemployment and creaking supply lines, but not a denuding of American pensions and wealth. "A self-inflicted pandemic” is warning enough, will the President listen?
 

Overnight Pricing