Deutsche Bank: The market has ‘lost faith’ in US assets
A “remarkable” sell-off in the dollar and US Treasuries suggests global markets have lost faith in American assets, and risks sparking an “outright financial war” that could force the Federal Reserve into another round of quantitative easing, Deutsche Bank’s top FX analyst has warned.
In a wide-ranging note on Wednesday, George Saravelos said that the speed of the concurrent falls in the dollar, US equities and government bonds was unprecedented and there was little to suggest it would remain orderly.
“We are witnessing a simultaneous collapse in the price of all US assets including equities, the dollar versus alternative reserve FX and the bond market,” he wrote.
“We are entering unchart[ed] territory in the global financial system.”
Saravelos, Deutsche Bank’s global head of FX research, argued that equities falling in parallel to the dollar and the US government bonds suggested that global markets had “lost faith in US assets” and were seeking refuge from the fallout elsewhere.
“It remains to be seen how orderly this process can remain,” he added.
Since 3 April the America’s blue-chip index, the S&P 500, has fallen as much as 12 per cent, with more losses expected when US markets open on Wednesday.
The strategist added that the rout across all US asset classes could compel the country’s central bank, the Federal Reserve, to take drastic action to stem the across-the-board collapses up to and including another round of quantitative easing.
The monetary policy tool—whereby central banks buy government bonds to keep the asset class’s price up and yields down—would be applied in a way redolent of the Bank of England in 2022. Then, the UK’s central bank launched an ‘asset purchase facility’ to prevent the worst fallout from the Liz Truss-induced LDI crisis of 2022.
Saravelos, who in a note before so-called ‘Liberation Day’ warned the dollar risked losing its safe haven status, wrote: “While we suspect the Fed could be successful in stabilising the market in the short-term, we would argue there is only one thing that can stabilise some of the more medium-term financial market shifts that have been unleashed: a reversal in the policies of the Trump administration itself.”
The strategist added the Fed would be more likely to deploy the emergency measure if the trade war shifted to an “outright financial war” between China and the US because the two countries can’t erect much higher trade barriers.
Both countries have rapidly ramped up levies on commerce between each other in the past 24 hours, crippling the feasibility of trade between the two countries. Tariffs on trade between China and the US are currently at 104 per cent and 84 per cent, respectively.
The impasse could lead Donald Trump and Chinese Premier Xi Jinping to reach for other financial levers, Saravellos warned, adding: “With a 100 per cent plus tariff on China, there is little room now left for an escalation on the trade front.
“The next phase risks being an outright financial war involving Chinese ownership of US assets, both on the official and private sector front.”