Why did the recent U.S. sell-off quickly reverse? Deutsche Bank: Policy easing and the absence of economic recession are the main reasons
Recently, the U.S. financial markets experienced significant volatility, but the sell-off quickly reversed, and the market stabilized. Deutsche Bank AG pointed out that the market reversal was mainly due to the U.S. economy not falling into recession, a decline in oil prices easing inflationary pressures, and a softening of government policies. In April, non-farm payrolls increased by 177,000, indicating resilience in the labor market, and economic activity continues. Oil prices have dropped by 20% since April 2, providing support for risk assets
Recently, the U.S. financial market experienced a sharp fluctuation, but the sell-off quickly reversed, and the market stabilized. Is the market just a "false alarm"?
This week, the S&P 500 index and Europe's STOXX 600 index have almost completely recovered the losses since April 2. The U.S. credit spread has also narrowed significantly, giving back most of its previous gains. Long-term government bond yields have remained relatively stable.
According to news from the Wind Trading Desk, Deutsche Bank pointed out in its research report on the 6th that this round of market reversal is mainly attributed to three points: First, macroeconomic data shows that the U.S. economy has not fallen into recession; second, the decline in oil prices has alleviated inflationary pressures, providing room for potential interest rate cuts.
Finally, the U.S. government's policies have softened, and the tendency for trade protectionism has weakened. On April 7, CCTV reported that Trump is considering suspending tariffs on certain countries for 90 days. These factors have collectively driven the rapid rebound in the market.
Economic Data Remains Strong: Recession Concerns Are "False Alarms"
The market experienced sharp fluctuations after April 2, but Deutsche Bank's research indicates that although investor concerns about economic recession are widespread, economic data has not supported these worries.
First, macro data has not shown signs of economic contraction. In April, U.S. non-farm payrolls still increased by 177,000. This data stands in stark contrast to historical recession periods, where non-farm employment typically begins to decline in the first month of a recession, but this data shows the resilience of the labor market.
Secondly, although economic survey data has declined, it remains in the expansion range. The ISM services index for April was 51.6, and the U.S. composite PMI was 50.6, both above the 50 mark that separates expansion from contraction. This indicates that economic activity is still ongoing, although the growth rate has slowed. Additionally, global data has not shown signs of economic recession; although economic growth has slowed, there has not been widespread economic contraction.
Declining Oil Prices "Unexpectedly Assist": Alleviation of Inflationary Pressures and Rising Expectations for Rate Cuts
The decline in oil prices is another important factor supporting risk assets. The Deutsche Bank report noted that since April 2, Brent crude oil prices have fallen from about $75 per barrel to $60.23 per barrel, a decline of 20%.
Despite the fact that tariff policies may push up inflation, the deflationary pressure brought about by falling oil prices has somewhat offset the impact of tariffs. More importantly, the decline in oil prices has increased market expectations for interest rate cuts. Deutsche Bank pointed out that this change is extremely favorable for the market, as the warming expectations for interest rate cuts help enhance the attractiveness of risk assets.
Deutsche Bank stated that previously, many central bank officials were cautious about interest rate cuts, especially considering the impact of tariffs. Federal Reserve Chairman Jerome Powell also emphasized the "obligation" to maintain stable long-term inflation expectations. However, the decline in oil prices will exert downward pressure on recent inflation, providing greater space for central banks to cut interest rates, especially as the labor market begins to deteriorate.
Policy Shift: Easing of Trade Protectionism
Deutsche Bank noted that after the initial sell-off, there has been some shift in U.S. government policy, with a weakening tendency towards trade protectionism. On April 7, CCTV reported that Trump is considering suspending tariffs for 90 days on certain countries, leading to the S&P 500 index recording its largest single-day gain since 2008. Additionally, positive signals from trade negotiations with other countries have also boosted market confidence.
The stock market became very underweight after the sell-off, but the "Mag7" has outperformed the broader market since April 2, rising by 1.1%, which has driven the overall increase in the S&P 500 index.
Lessons Learned: Will History Repeat Itself?
Deutsche Bank indicated that the current market situation is similar to last summer when the market briefly fluctuated due to deteriorating economic data and recession fears, but rebounded quickly as recession risks diminished.
Although the market has anticipated interest rate cuts, if cuts do not materialize because economic growth exceeds expectations, the market may still perform well.
Deutsche Bank also mentioned that the current market rebound may not be favored by some investors, but many unfavored rebound trends have lasted quite a long time. The research report cited the market rebound in 2020 and the market rise in 2023-2024, noting that these rebounds were accompanied by investor doubts but ultimately lasted for a considerable period.
Discussions in the market about the end of the "American exceptionalism" narrative are not new. In the early 2010s, political gridlock in the U.S. raised concerns about the economic outlook. However, in hindsight, these concerns did not hinder the sustained excellent performance of the U.S. economy and market in the medium to long term. Deutsche Bank stated that, in fact, even as investors raise the probability of a U.S. economic recession today, the International Monetary Fund (IMF) still predicts in its World Economic Outlook that the U.S. will be the fastest-growing country among the Group of Seven (G7) in 2025 and 2026.
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