By Jamie McGeever
ORLANDO, Florida (Reuters) - TRADING DAY
Making sense of the forces driving global markets
By Jamie McGeever, Markets Columnist
Wot's ... uh the deal?
A wave of trade optimism washed over markets on Thursday as a deal between the United States and Britain, cooling global tensions and a generally less belligerent stance from Washington spurred sharp gains in equities and other risk assets like bitcoin.
In my column today I dig into why the tariff chaos of last month meant macro hedge funds in April suffered one of their worst maulings in years, and why the near-term outlook remains challenging. More on that below, but first, a roundup of the main market moves.
I'd love to hear from you, so please reach out to me with comments at jamie.mcgeever@thomsonreuters.com. You can also follow me at @ReutersJamie and @reutersjamie.bsky.social.
If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today.
1. Trump castigates Fed's Powell for not cutting rates,downplays inflation risk 2. Can Trump's tax cuts be made permanent? Tariffs,spending fights cloud the picture 3. Investors add Fed rate uncertainty to tariff murkiness 4. Europe braces for Transatlantic capital reverse: MikeDolan 5. 'Friends of steel': Xi and Putin pledge to standtogether against U.S.
Today's Key Market Moves
* Wall Street posts solid gains, the three main indicesgaining between 0.6% and 1%. Energy performs well as crude oilprices rise more than 3%. * The dollar strengthens 1% against a basket of majorcurrencies, its biggest rise in six months. * Treasury yields rise broadly, especially at the belly ofthe curve where the 5-year yield spikes 13 basis points. * Bitcoin jumps 5%, above $100,000 for the first time sinceFebruary. It's now up 35% from the 'Liberation Day' lows. * Brazil's Bovespa leaps 3% to a record high above 137000points, sentiment also boosted by the central bank nearing theend of its tightening cycle.
Tariff tensions cool, markets sizzle
If this week has felt like markets have been treading water, waiting for investors to take a bullish or bearish view on the next phase of the global trade war, a clear direction seems to be emerging now. And the bulls are in the driving seat.
In the last 24 hours there has been confirmation of high-level U.S.-China talks taking place this weekend, a U.S.-UK trade deal, a U.S.-Ukraine minerals deal, and positive soundings from U.S. President Donald Trump that further agreements are close.
The S&P 500 and Nasdaq are back above their closing levels on April 2, Trump's tariff 'Liberation Day' that sparked a market meltdown, wiped trillions of dollars off the value of U.S. stocks, and forced him to back down days later.
On Thursday, Brazil's stock market rocketed to a record high, bitcoin leaped back above $100,000 and is up 35% from its post-Liberation Day lows, and bond yields shot higher.
Whether this optimism is justified remains to be seen. As Federal Reserve Chair Jerome Powell said repeatedly on Wednesday, there is no clarity at all on what the economic impact of tariffs will eventually be. All we know is uncertainty has rarely been higher, and inflation and unemployment risks are rising.
The U.S. central bank left policy unchanged as expected, resisting calls from Trump to lower interest rates, with Powell insisting the Fed needs more "hard" economic data before deciding its next step.
But other major central banks are more worried about the risks to growth and are cutting rates. They include the European Central Bank, the People's Bank of China and, despite a surprise three-way vote split on Thursday, the Bank of England. Little wonder the dollar is trading at its highest in a month.
The PBOC snapped a run of seven consecutive days fixing the yuan at a stronger level against the dollar, fixing the currency at 7.2073/dollar on Thursday. The yuan also weakened on the onshore and offshore spot markets, and goes into Friday slipping further back from Monday's highs of the year.
Macro hedge funds mauled in April
While many investors survived the market volatility unleashed by U.S. President Donald Trump's "Liberation Day" with only a few scratches, macro hedge funds suffered one of their worst maulings in years.
HFR's benchmark composite fund index fell by only 0.5% inApril and the equity index actually rose, according to datareleased on Wednesday, but macro strategists were caughtflat-footed by the steep declines in the dollar, oil, andshort-dated Treasury yields and whiplashed by a brief, buthistoric, selloff in long bonds.
Consequently, macro hedge fund strategies lost 2.7% in themonth, according to HFR, equaling the losses in March 2023 amidthe turmoil caused by the U.S. regional banking crisis. The lasttime macro strategies had a worse month was February 2018 due tothe "Volmaggedon"-fueled market turmoil.
Macro funds suffered, in part, because April marked a sharpshift in correlations between several asset classes – includingabrupt reversals in some markets and accelerated moves in others– as well as a surge in margin calls and huge shifts in capitalflows as many investors reduced their U.S. allocations.
BIG SHORT
At the start of April, hedge fund managers' positioning inthe dollar was roughly flat, according to Commodity FuturesTrading Commission data. They had unwound net long dollarpositions worth around $35 billion in the prior two months asthe greenback fell 4% against a basket of major currencies.
Macro funds started to rebuild their longs in the first weekof April, but any hopes of a dollar rebound were obliteratedfollowing Trump's tariff announcements on "Liberation Day". Thedollar fell 4.5% in April, its steepest fall since November2022, and the euro sealed its best two-month performance since2010.
CFTC data also shows that leveraged funds extended theirshort positions in two-, five- and 10-year Treasury futures. The$1.0+ trillion short position, in aggregate across the threematurities, is now the highest this year, and in the five-yearcontract it is the biggest on record.
Funds take these positions for many reasons such as hedgingand arbitrage plays. But those making a directional bet on ratesgot burned - yields fell in April, particularly at the short endand the belly of the curve.
'SO MUCH UNCERTAINTY'
Macro funds' hefty losses underscore investors' deepconfusion about U.S. policy and, by extension, the outlook forasset classes across the board.
JPMorgan's quant and derivatives strategists say macro fundmanagers were actually penalized for remaining cautious. Theywere not prepared for the 'V-shaped' recovery in equities andother risk assets in recent weeks, so the recovery in macrofunds and commodity trading advisors (CTAs) has been "modest"with "little sign of a reversal", they wrote on Wednesday.
This contrasts with equity-focused funds who de-risked inFebruary and March and were thus well positioned for the rapidrally seen in the last few weeks, they added.
But trend-following macro fund managers could be forgivenfor retaining a "glass half empty" outlook. Trade tensions arestoking inflation and unemployment risks, and Federal ReserveChair Jerome Powell on Wednesday basically admitted that he andhis colleagues have no idea what the correct policy responseshould be because visibility is so low.
"There's so much uncertainty ... there's so much that wedon't know," Powell told reporters after the central bank leftinterest rates unchanged, a message he drove home in manydifferent ways during his 41-minute press conference.
He isn't alone. Consumer sentiment is nose-diving,businesses are scrapping forecasts and investor conviction isrunning low even as markets have stabilized in the last fewweeks. Macro hedge fund managers' confidence may simply berunning lower than most.
The 2.7% fall in HFRI's Macro Index last month wiped out allits gains from the first quarter. A sustainable rebound willalmost certainly require longer-term trends and correlations toemerge across currencies, rates and commodities. Right now, thatlooks like a long shot.
What could move markets tomorrow?
* China consumer, producer price inflation (April) * Japan household spending (April) * Brazil inflation (April) * Canada employment (April) * Eight Fed officials speak at various events. They are: FedBoard Governor Michael BarrFed Board Governor AdrianaKuglerRichmond Fed President Thomas BarkinChicago Fed PresidentAustan GoolsbeeNew York Fed President John WilliamsFed BoardGovernor Lisa CookCleveland Fed President Beth HammackSt. LouisFed President Alberto Musalem
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
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(By Jamie McGeever, editing by Nia Williams)
