Memo

Tariffs, Market Volatility, and Key Drivers Ahead

Overview

As of midnight, 25% tariffs on Canadian and Mexican imports and an additional 10% tariff on Chinese goods took effect, targeting 60% of U.S. imports. Combined with shifting market narratives, this has triggered volatility in equities, crypto, and broader sentiment. Here’s the breakdown:

Key Developments

1. Last Week’s Shift: Inflation to Growth Risks

   • Retail Data Shift: New figures from companies like Walmart and PMI numbers revealed a slowdown in consumer spending, flipping the market’s focus from `tariff-driven inflation` to potential `demand-side risks`. Tariffs are no longer just a price story, they’re forcing U.S. importers and foreign producers too.

   • Rate Cut Surge: This pivot boosted expectations for Fed intervention, with the probability of a June rate cut nearing 100%. Investors now see tariffs as a potential drag on corporate profit margins, giving the Fed more room to act.

   • Tech Boost: Nvidia’s firm earnings report added fuel to the rally, reassuring markets that growth pockets remain strong despite broader pressures. The combo of rate cut bets and solid tech performance drove equities higher last week.

2. This Week: Uncertainty Returns

   • Crypto Volatility: The week kicked off with a sharp crypto rally, followed by an aggressive sell-off. This rollercoaster spooked broader markets, amplifying risk-off momentum across asset classes.

   • Market Reaction: The S&P 500 and crypto have pulled back as uncertainty grows. Investors are torn between tariff-related growth risks and the hope that Fed rate cuts will offset the damage.

Market Drivers to Watch

• Rate Cut Hopes: A dovish Fed could cushion the blow, especially if growth concerns intensify. The interplay between tariff pain and Fed relief is the core tension right now.

• Uncertainty: Markets hate ambiguity. With the administration teasing a “big announcement” Tuesday, the lack of specifics is keeping risk-off sentiment alive

Market Scenarios

• Bearish Case: Tariffs hit demand and profit margins harder than expected, growth fears dominate, and volatility persists. Equities and crypto could see further downside.

• Bullish Case: Rate cut expectations hold firm, we can see a rebound as markets refocus on Fed support. It all depends on the focus of market participants. Let’s see if the growth or inflation concerns will outweigh.

• Base Case: Uncertainty keeps markets choppy near term. Hard data like NFP will break the deadlock. Either toward stability or deeper turbulence.

• Nonfarm Payrolls (NFP): Friday’s jobs data will be pivotal. Weak numbers could lock in early rate cuts, supporting equities. A strong report might ease growth fears but reduce Fed urgency, potentially reigniting volatility.

Best,
Roy Güllüoğlu
Founder, Rationale

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The investment information, comments, and recommendations I provide to you are not investment advice. These recommendations are general and are not specifically tailored to your financial situation and risk and return preferences. Therefore, making an investment decision based solely on the information contained herein may not produce results in line with your expectations.