Welcome to the stagflation vortex: Powell whiffs as trade war goes full metal jacket

Markets

US stocks got absolutely smoked Wednesday as Fed Chair Jerome Powell stepped up and delivered… an airball. Traders looking for even a whiff of a dovish pivot got nothing but rim. The Dow dumped 700 points (-1.73%), the S&P 500 sank 2.24%, and the Nasdaq faceplanted with a 3.07% dive — all triggered by Powell’s blunt take on the tariff barrage: “unprecedented” and likely to trigger “higher inflation and slower growth.” Translation? Welcome to the stagflation vortex, where the US is now the epicentre of both the growth scare and the inflation freakout. That’s the kind of toxic combo that history shows equities simply can’t fight. With the two-headed macro monster roaring louder, the tape is screaming repricing, and there's no Fed cape on the horizon — just policy uncertainty and widening cracks.

The U.S.-China trade war has gone full Metal Jacket — we’re well past the tariff tit-for-tat and barreling into total economic warfare. This isn’t just a customs spat anymore. Now it’s chips, critical minerals, pharmaceuticals, mail, aircraft — the entire economic kitchen sink is in play. Trump’s latest salvo? A tariff wall on China now stands at a whopping 245%. Yes, it might fall into the law-of-diminishing-returns bucket, but the optics? Brutal. This reeks of trade policy being drafted on a cocktail napkin mid-flight.

Markets? Buckled on cue. The dollar took another punch to the gut while gold launched into orbit, breaking through $3,300/oz like a hot knife through butter — a clear signal traders are strapping on hedges as the fog thickens. The cash equity open felt like a flashbang went off. Vol desks couldn’t reload fast enough, and safe-haven flows lit up the tape.

This isn’t just about China anymore. It’s about trust — or the evaporating lack thereof — in the U.S. policy playbook. The Fed may be the last adult in the room, but even their ability to keep things glued together looks suspect when trade policy reads like a Reddit thread. If this is the new global trade architecture, it’s being built with gasoline and matches.

Beijing, emboldened — but arguably misled — by a front-loaded Q1 GDP beat that looks better on paper than in the ports, is now in full counterpunch mode. Real-time cargo data paints a starkly different picture: inventory buildups, shipping dislocations, and a brewing logistics snarl. But that hasn’t stopped China from swinging back hard. Boeing deliveries? Suspended. Tesla’s component pipeline? Stalled. Even mail? Halted. This isn’t diplomacy — it’s economic bare-knuckle brawling, and the tape is reacting accordingly. Wall Street futures are bleeding red again, and risk appetite is evaporating fast.

Gold, meanwhile, has gone full lifeboat mode — up 26% on the year and now officially the most crowded trade on the planet, knocking the “Magnificent Seven” off their speculative perch. Nearly half of global asset allocators have crowned it the top play. Why? Because this isn’t just a China tantrum or another Fed misstep — it’s the perfect storm: Beijing is hoarding bullion like it's a wartime asset, the dollar is stumbling under the weight of trade-policy whiplash, and portfolio managers have lost faith in anything that involves political discretion.

This is the moment when trust — not inflation, not growth — becomes the macro driver. And that’s why the gold chart is parabolic. It’s not about shiny rocks; it’s about shielding portfolios from a system that feels more reactive than rational. When every central bank pivot comes with caveats and the Fed feels pinned between stagflation and market dysfunction, cash isn’t king — gold is.

Even the euro is rallying into what could be a dovish ECB cut this week. Let that sink in. Traders are effectively saying: we’d rather rotate into a rate-cutting Europe than hold dollar assets into the unknown. That’s not a reflation play — it’s a trust play. And right now, the dollar’s monopoly on that trust is cracking wide open.

I don’t know what to tell you folks, but as I was saying to one of my traders just the other day — even during those fleeting moments of calm, don’t even think about taking off that negative US skew. Whether you’re expressing that view through long gold and euro, short yen, or just leaning into downside skew on the S&P 500 to 4800, the core message is the same: we’re in a market that inches forward with hope only to faceplant a day later — and sometimes takes the express elevator down while doing it.

I have a saying on the desk “ When the chips are down, forget the bounce — dead cats don’t rally, they just renounce”

Wednesday was a case in point. After a brief lull, traders got smacked with another round of tariff tremors courtesy of the Trump administration, and markets buckled hard. Big Tech — the supposed fortress of cash flow — was the casualty du jour, with Nvidia and its peers eating a face-full of policy shrapnel. China might be the target, but let’s be real: U.S. firms are getting caught in the crossfire. I have a saying on the desk “ When the chips are down, forget the bounce — dead cats don’t rally, they just renounce”

Last week it was Apple, and the White House blinked. This week it’s Nvidia. The question is — will the market carnage prompt another policy pivot, or is this just the new normal? Either way, keep the hedges on and the helmet tighter. This isn’t over.

Forex markets

Volatility is still soaring, and that typically signals an opportunity to begin purchasing dollar FX, yet there isn't a bid to be found.

Meanwhile, the dollar’s classic reflexivity to U.S. data is broken. Retail sales? Front-loaded by shoppers panic-buying Made-in-China basics before the tariffs hit. The reaction: a yawn with a giant asterisk. Markets know the tape is distorted, so even good prints are getting the fade. Simply put, nobody’s buying the dollar on rosy data anymore.

And the real trade has been in rotation — out of U.S. assets, into Europe. FX traders have been sniffing this out for weeks, frontrunning the shift like pros since "guns vs butter" re-entered the EU fiscal lexicon. Real money is moving. Over the 12 months to January, eurozone investors offloaded EUR134bn into non-EZ equities Meanwhile, foreigners snapped up EUR334bn of eurozone equities — that figure should rise further if U.S. asset managers keep tilting into EU exposure, drawn by the fiscal wave. Euro area monthly balance of payments: February 2025)

Although still core long EURUSD, I’ve staked my turf: to triple down long EUR/USD with heavy bids from 1.1275 to 1.1325, and buy strikes sitting fat above 1.1425. A clean break there and we’re on the move to 1.1500+, with the summit climb targeting 1.1600–1.1800. This isn’t just momentum — it’s real money flow, driven by either hedging up dollar exposure ratios in US assets or outright repatriation.

Let me be clear: I’m not backing the ridiculous theory that the dollar has lost its safe-haven badge forever. But let’s be honest: softer U.S. growth is coming, and the Fed’s easing cycle in H2 is going to punch the dollar lower. Sprinkle in a Mar-a-Lago-flavoured trade accord reset? That’s your bearish dollar cocktail right there.

So no, this isn’t about the dollar losing its global crown — but the yield tourists who piled in for the easy carry are now demanding too fat a risk-adjusted premium. And here’s the kicker: they’re increasingly eyeballing Europe as the better “risk-adjusted” landscape. Cleaner fiscal optics, coordinated stimulus, and just enough distance from the tariff dumpster fire. So they’re bolting — to the cleanest dirty shirt in the FX laundry. And that, my friends, is what’s driving the tape right now.

Oil markets

Oil futures pulled off a late-session reversal on Wednesday, with Brent punching back above the $65 handle for the first time in a week. On the surface, it looked like a case of olive-branch diplomacy propping up a bearish tape — but scratch a bit deeper, and it was classic two-step: OPEC+ compliance chatter plus a bullish U.S. inventory read.

Iraq quietly signaled it would trim oil exports by 70,000 barrels a day this month under rising pressure to meet its OPEC+ quota — a move that gave the market a much-needed shot of supply-side discipline. Meanwhile, U.S. government data delivered the real kicker: inventories at Cushing, the delivery hub for WTI, dropped by 650,000 barrels — to the lowest level for this time of year since 2008. Gasoline stockpiles also slipped, and judging by the foot traffic at American shopping centers lately, that checks out.

Bottom line: supply’s tightening at the margins, demand’s holding up better than feared, and the oil market, for now, found just enough ammo to bounce off the mat.

The view

President Trump may have played the statesman with his “Big Progress!” post after meeting Japan’s trade delegation, but the real fireworks are happening behind the scenes — and they come courtesy of Japan’s institutional power player.

The GPIF — the world’s largest pension whale — just dropped a geopolitical bombshell, quietly removing China A-shares from its foreign equity benchmark. That’s not a tweak — it’s a neon-lit exit sign from mainland Chinese risk. Flows from Japan’s $1.7 trillion behemoth into Chinese equities are now effectively capped, if not dead. Reallocation flows are likely to head toward developed Asia ex-China, back into Japan Inc., and yes — into the U.S.

In trader speak: this is your macro smoke signal. With Japan’s top brass in D.C. and even Trump rolling out the red carpet for Akazawa, the optics scream alignment. Geopolitically, it’s a double win for Washington. Economically, it’s a major confidence boost for Team USA, signaling Japan’s most important capital allocator is leaning into de-risking China exposure — just as others are itching for permission to do the same.

It also validates a broader theme we’ve been front-running: the slow-motion “China exclusion” already playing out in passive index flows, sovereign mandates, and FX reserve positioning. This move could unlock a wider rotation away from China and into U.S. and Japan-aligned portfolios.

Let’s be real — China’s currency regime is still a peg in drag. It pretends to float but doesn’t really go anywhere. That’s a huge headache for hedging, and an even bigger problem when it’s time to unwind. So capital allocators are getting out ahead of the next trapdoor.

What’s the trade? Stay long Japan Inc. — tailwinds and policy support — and keep an eye on the yen. If the GPIF starts shifting allocation home, Japan risk assets are going to catch a bid, and flows will follow.

The bottom line is that this isn’t just a passive rebalance — it’s a strategic repositioning that is in sync with the new economic order. The U.S.-Japan trade axis is heating up fast, and GPIF’s move just made it crystal clear: the future of Asia allocation no longer includes China.