IMF – Waning investor trust in US assets
Last week, the Global Credit Team attended the IMF meetings in Washington DC. The IMF meetings in Washington DC painted a marginally positive picture on US trade policy but highlighted medium-term concerns over a loss of trust in US assets, amid chaotic policy choices and waning US exceptionalism.
Investors expect US tariff headlines to be incrementally positive, as most notably Scott Bessent guided to a near-term de-escalation with China early last week. The markets base-case is a mild recession, where US hard data is expected to remain stable until summer, but may fall strongly thereafter forcing the Fed to accelerate rate cuts. US fiscal policy remains problematic, where deficits are more likely to rise than fall on the tax cut extensions, and may rise up to 10% in a recession.
European faces a golden opportunity, benefiting from a material fiscal policy turnaround led by Germany, but investors questioned if the region will actually seize it.
The loss of trust in the current US administration and in turn US assets is seen as permanent, as investors seek to continue rotating out of the US into the rest of the world (most notably into Europe), and the US Dollar is likely to fall further.
Russia/Ukraine discussions were mostly focussed on a scenario where the US abandons talks amid frustration with Ukraine, which in turn would leave Ukraine’s critical infrastructure vulnerable. Chances of a near-term deal were seen as slim, although the situation is evolving daily with Trump meeting Zelenskiy in Rome over the weekend. Views on EM were split, as a weaker USD benefits the region, but the cyclicality of the asset class poses downside risks in a global slowdown.
US – Fed up with tensions
Tensions regarding the next moves of the US administration remain high. Last Monday, US assets went under pressure on fears Fed Chair Powell could be fired. President Trump then reiterated a dismissal of Powell is not the main plan. Trade remains at the center of the discussion, with IMF meetings in DC bringing a somewhat more conciliatory tone from Treasury Secretary Bessent and CEA Chairman Miran. Leaks suggest both China and US are willing to take small steps to de-escalate but high level contacts don’t seem immediate. Trade deals ex China require months, according to US officials. If current status quo is not lifted during the negotiation phase risk assets have further downside since the current set of trade restrictions is more damaging to global macro than consensus prices.
ECB – Dovish drumrolls
The ECB is turning more dovish as a consequence of trade tensions. Following the April 17th meeting, last week saw a line-up of speakers at IMF meetings in DC. Rehn and Lane, consensus centrists, floated the idea of a 50bp cut in June. Holzmann, one of the major hawks of the Governing Council, was vocal about the disinflationary impact of tariffs on Europe. President Lagarde echoed both messages. As the new status quo and a strong currency open downside to both growth and inflation forecasts published in March, we expect tone and policy to continue leaning on the dovish front.
Algebris Investments’ Global Credit Team
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