April recap: Volatility reigns supreme

In episode #10 of The Active Investor with SGH – April recap: Volatility reigns supreme, Steve Hiscock and Rob Hogg unpack the sharp market moves triggered by Trump’s unexpected tariff announcements, dramatic shifts in the bond market, and what foreign investor behaviour tells us about confidence in US assets. They explore why Australia’s market outperformed, the role of interest rate expectations, and what the recent wave of April volatility could signal for the months ahead.

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April recap: Volatility reigns supreme

Transcript:

Steve Hiscock:

Hello to everyone listening to our podcast, the Active Investor with SGH. I’m Steve Hiscock, the company chair, and it’s my pleasure to be your host for today’s episode. In today’s podcast, we’ll examine what happened in April 2025 and discuss the outlook for the future. This podcast was recorded on Tuesday, May 6th, 2025.

Our Chief Investment Officer, Rob Hogg, is joining me again today. Hi Rob, welcome back again. What a month. I mean, markets are always unpredictable, but April was crazy. Let’s start with President Trump’s tariff announcements. They were again the key driver for global market movements during the month, and we spoke about this mid-month.

The unpredictability of policy announcements and their subsequent changes caused incredible volatility over April, starting with a so-called Liberation Day. Tell us what happened.

Rob Hogg:

Yeah, so Steve, as you said, it was yet another month, and I suspect it’ll just be one of many months where markets continue to be buffeted by President Trump and his announcements. So, April was entirely dominated by tariff announcements. That kicked off early on April 2nd, with Liberation Day, when the tariffs were announced. And look, they proved to be significantly larger than investors had been expecting, and pretty much on the announcement led to a very sharp downturn in equity markets and bond yields across the globe in the very first week of the month. However, about a week later, the bond market started moving in the other direction. Yields started rising, and in fact, it was an afternoon Australian time. During the Japanese trading session, US government bond yields rose by about half a per cent, so that was the 10-year bond and the 30-year bond up by about half a per cent in that single trading session of several hours. That is a signal that things are really starting to become quite unhinged. And that seems to have caused Trump to announce his pause on tariff implementation.

From that point, equity markets gradually recovered once he announced the pause, and global bond yields retreated somewhat from their mid-month highs. And I think the really important thing about all of this is that we’ve spoken about guardrails around the new administration, particularly around Trump.

During the month, we saw a key guardrail being the US government bond market. When it started to show signs of incredible stress, that seemed to have been the key contributor to the turnaround on some of the tariff talk—the pause on implementation.

Steve Hiscock:

Well, honestly, it’s good that there are guardrails. So the 0.5 rise in bonds. That’s historically a very rare event, isn’t it?

Rob Hogg:

Yeah. Well, certainly in a couple of hours.

Steve Hiscock:

You mentioned, Rob, that the move came in the Japanese trading session.

I see that many have speculated that a large amount of the US 10-year bond selling actually came out of China and Japan. Would that imply that that’s right? The reality is, I guess, that for China and Japan, it’s really hard for them to find a yield as attractive as the US 10-year and in the volumes that they need.

So, maybe the UK is a big enough market for them, but are they really going to sell their bond holdings?

Rob Hogg:

Yeah, no, there’s been much speculation about what the cause might have been. Was it a buyer’s strike? Was it related to some of the arbitrage-related activity in the US government bond market? Whereby some leverage investors buy the underlying physical bonds that match the futures contract and sell the futures contract. Look, the reading that I’ve done – and I point to Citi analysts on this – they’ve looked at the movement in both government and foreign private investor demand in particular. During the week of most turbulence, there really wasn’t much evidence of official sales, so government or, more likely, central bank sales. However, what seems to have occurred was a significant drop in private investor demand, so I think that is more likely to have been the cause of foreign private investors just taking the view. However, given the volatility with tariffs and policy more broadly, they just wanted a higher yield to take on the risk of US assets. A higher yield and/or a lower US dollar, because, of course, the lower US dollar has also occurred. So it’s probably a combination of those two factors. And, in a sense, it’s a de-rating of US government bonds.

Steve Hiscock:

Yeah, so is there any data that shows investors can ultimately determine who the sellers were?

Rob Hogg:

We can certainly see what happens with official holdings in the Fed’s custody account. They did decline somewhat, but that wasn’t until the end of the month.

So, halfway through the month, this particular meltdown seems to have been more driven by foreign, private investors.

Steve Hiscock:

What did happen, though, was that that single-day move really caused the Trump administration, and President Trump in particular, to backtrack a bit on some of his tariff announcements.

Where are we at now with the tariff announcements?

Rob Hogg:

It’s not entirely clear, but there are a couple of things we do know. One is that Japan’s trade representative met with the US Treasury Secretary earlier this month on May 1st with trade talks. And that the Japanese trade delegation extended their trip for an additional day until Friday, May 2nd. There’s been talk about Chinese negotiations. They seem to have taken longer than expected to begin, but there seems to be some sort of movement there.

There’s talk about potential negotiations with India and several other countries. And look, I think this is how it’ll probably pan out: We’ll see trade deals of some shape or form occur between the US and other individual countries over the coming weeks and months.

Steve Hiscock:

Yeah. And in the meantime, the equity markets will remain volatile while the announcements come out. But we’ll talk about the equity markets in a little while. Just looking at the US dollar, Rob, you mentioned it was a little bit weaker and certainly did weaken a fair bit in April. Traditionally, it has been a safe haven, particularly in times of volatility, but it certainly wasn’t this time. Firstly, let us know your thoughts on the US dollar. Secondly, could you please comment on the view that we potentially see the end of the US dollar as a safe haven?

Rob Hogg:

I think we’ve seen the slight repricing of US dollar assets as safe havens. That’s a product of the high yields across the treasury curve and the lower trade-weighted value of the US dollar. No other currency will fill the role that the US dollar has as that global benchmark and US assets for that matter, as a global benchmark. But I think what we’ve seen over the last month in particular is just a slight repricing of really the risk premium that global investors are now asking for to continue to hold the US dollar and US assets.

What makes this all a little bit unusual, this whole episode? Generally, the US dollar rallies on a trade-weighted basis during times of growth fears. But that’s not happening this time. And I think it’s, as we’ve spoken about before, related to the fact that it’s policy uncertainty. It’s US policy uncertainty that’s having the impact. It’s all homegrown, it’s coming from the US. And this, along with the fact that an increasing proportion of the US current account deficit has been financed by foreign buying of US equities, has also made things slightly different. So typically, foreign investors in US government bonds do that financing. Still, over the last four or five years, an increasing proportion of the current account deficit has been financed with equities, foreign purchases of US equities. So when you get a repricing of confidence and risk about US assets on the back of US policy uncertainty, and you’ve got the US market trading at near record highs, and you’ve had enormous inflows into the US market, I think all of the ingredients are there for a lower US dollar and some weakness in US equities at these sorts of times.

Steve Hiscock:

Right. You mentioned policy uncertainty. And certainly, Trump added to that when he went on the attack against his own Chair of the Fed, calling him a major loser.

Even though he has been talking about trying to get rid of the Fed Chair, it’s hard to see him getting rid of Jerome Powell, isn’t it?

Rob Hogg:

Look, it is. The Federal Reserve Act says the president can only fire a Federal Reserve governor for cause. But I guess with Trump, there’s every possibility of some cause being found. But I think this goes back to the guardrails again. So, Powell, I think it’s fair to say, enjoys global investor confidence and for him to be sacked would very likely be extremely negative for the US government bond market. Consequently, it’s pretty negative for US equities and the US dollar. So I imagine it’ll be a case of the guardrails. Instead, what I think is happening is that Trump’s just setting up Chair Powell as a scapegoat. And if the economy does weaken, it does seem most likely, and the Fed hasn’t cut as much as Trump wants, I think Powell will be a very convenient scapegoat. So I don’t expect these sorts of comments and this tension between them to go away anytime soon. Similarly, I don’t expect we will get to the point where Trump actually sacked Powell. I think the impact of that would be very significantly negative on US assets.

Steve Hiscock:

Yeah. And if Trump did fire Powell and put in his person, then he would have no one to blame. So talking about the economy, it’s early days regarding the administration in terms of hard data. But certainly, the comments from US corporates haven’t been positive.

I note we had a negative first-quarter calendar year GDP figure, which was significantly affected by increased imports. Start with the hard data and tell us how the US economy’s going, and then perhaps if you could look at the forward-looking indicators.

Rob Hogg:

Yeah. So, certainly one of these hard data measures is that first quarter GDP or National Accounts read. But the nature of national accounts is that they’re a snapshot of the middle part of the quarter. So that’s effectively Feb, Feb edging into March. A little bit too early to be used as a guide to what’s happening, but it does seem that there were some trends there that were occurring in advance and in an expectation of the tariffs being announced and implemented. Specifically, there seems to have been quite a significant bringing forward of imports into the US to try and beat the tariffs and that is the key reason why the overall GDP number was negative. Imports in the whole national accounts calculation are very significant and are negative, and in the case of the first quarter, contributed around minus five percentage points, so significantly more than the total decline of just 0.3. To be fair, though, consumer spending, which contributed around one percentage point, was probably boosted by pre-tariff buying. But of the two, I think the more significant is the bringing forward of imports. So that negative drag has been a little more pronounced, I think, than any positive that might have come from the bringing forward of consumer spending.

So, putting that all together. First quarter GDP wasn’t a great guide to the actual underlying pace of the economy, but I think it was a good guide to how importers and consumers are reacting, trying to buy and import ahead of the tariff increase. Since then, we usually get a manufacturing survey and some hard data in the first week of May. That was the payroll and employment numbers that came out Friday night for April, and that was a lot stronger than expected. Right at the very top of the expected range. And that showed not only stronger employment, but also an unchanged unemployment rate. The participation rate, the proportion of the population either working or looking for work, was slightly higher again. So all of that, on the face of it, looks like a very positive outcome. However, the survey date for all of these numbers was April 12th. So again, a little bit too early.

So, in sum, the hard data. It’s still a little bit too early in the piece to make a judgment about how negatively the US economy is traveling. So again, we go back to the leading stuff, which tends to be survey-based data. Whether it’s corporate sentiment or consumer sentiment, all of these have continued to weaken.

And look, I thought I might just share some of the feedback compiled as part of the so-called ISM manufacturing survey. This is really, along with employment, the key data release in terms of market impact on a monthly basis. So, what were corporations saying in the manufacturing sector in response to the questions?

They said that uncertainty over tariffs is providing a big challenge for suppliers who will try to pass on tariffs to us in the form of price increases in tariff surcharges. So that speaks to margin compression. Another one said tariffs impact operations, delay border crossings, and require complex and not completely understood duty calculations.

Another one said the business climate is apprehensive with tariff costs implemented on all inbound Chinese shipments. That was in one particular industry segment, and I could go on. Tariff whiplash—the most important topic is tariffs. Domestic producers are charging more for everything because they can.

Tariff wars are incredibly volatile, so I think you sort of get the idea that the coalface feedback is all about the volatility, the uncertainty, the increased cost of the tariffs, and the fact that many decisions are being put on hold. Ford Motor Company has recently reported that they have withdrawn their forward-looking guidance, citing uncertainty surrounding the tariff policy. They said they think input costs going forward could increase by one and a half billion dollars. So again, that’s from obviously a very significant US corporation, the uncertainty that so much so they’re not in a position to provide any forward guidance.

Steve Hiscock:

No. And that’s like the word uncertainty, which you know, has been probably the most frequently used word in recent weeks. That one and a half billion that Ford has noted regarding their input costs. At the end of the day, someone has to pay for that. So either Ford absorbs it and their profits go down by one and a half billion, or the customer pays it, in which case inflation goes up.

I just don’t understand, and I’m not asking you for an answer, Rob. I just don’t understand the thinking behind it, with regard to how they think this can be a win, particularly over the short term for the US. So moving on to, I guess the major target that the US has, and we’ve spoken about this major target really, is China, although there are other countries as well. But how is China going?

It’s inevitable. I would’ve thought that some corporations would look to relocate their production away from China, Vietnam, and so on. But the reality is that while the US is a huge customer for China, they have a lot of other markets, don’t they?

Rob Hogg:

Yeah. Yeah, they do. And this is possibly one of the potential positives for the rest of the world, that Chinese goods will as a consequence of losing some or all of their market in the US, they’ll be looking for other locations and they’ll likely be asking for lower prices than would otherwise have been the case for those Chinese exports. So, you can imagine that the ongoing issues between the US and China lead to some sort of deflationary or certainly disinflationary impulse as far as global goods are concerned.

So, for Australia, that particular part of the puzzle could indeed be positive, putting downward pressure on inflation. And that’s likely to be the case around the rest of the world as well. And I think, yes, it is inevitable that a number of companies will move their production, some parts of their production, away from China, and in fact, that has already been occurring.

As you were saying, Vietnam and so on. There’ve been beneficiaries for a number of years now of corporates moving some of their, or all of their production out of China.

Steve Hiscock:

And I noted recently, just looking at the inflation forecast for the US.

Obviously, the US inflation forecast has increased. I think this was a UBS analysis. It increased by about 0.5-0.6%, but the world inflation for the calendar year 2025 only increased by 0.1%. So that’s exactly what you are saying, Rob. As an economy, the US will end up paying more for stuff, but the rest of the world will benefit.

Rob Hogg:

Yeah. They well could.

Steve Hiscock:

You talked about Australia. Australian equities really performed well over April in comparison to other countries. And, really, the way I see it, it’s reflecting its state. The current status is somewhat of a safe haven, but the reality is that maybe that performance was slightly marked by the fact that several stocks, such as Commonwealth Bank, did the heavy lifting over the month. That’s right, isn’t it?

Rob Hogg:

Yeah. I think you’re absolutely right. The Aussie market performed better than almost any other market in the world, returning slightly over 3.5% for the month. Yes, financials, particularly CBA, had a significant impact. So, CBA provided almost a third of that total return. NAB is also a big positive contributor, and Westpac is a positive contributor. Telstra was also a significant positive contributor here. So financials. Financials in total provided almost two percentage points of that 3.6% return over the month.

Looking at the areas that were dragging on performance, the energy sector was a key drag. And Woodside, Santos. Key drags in terms of individual contributions, but undoubtedly CBA is an absolute standout, providing almost a third of the market’s return. I think it’s worth pointing out that the Australian equity market provided one of the very best performances in local currency terms for the month, but that’s against the background where the shorter end of the yield curve here rallied. So yields fell by more than almost any other country in the world. So, and I think that’s one of the reasons as well, or supporting the Australian equity market, the fact that we do have, or the Reserve Bank has, the flexibility to cut rates.

And indeed that’s something we’ll probably see later this month. Inflation’s moving in the right direction. In terms of moving into the Reserve Bank’s band of 2% to 3% on average over the cycle, and it’s seems most likely that the RBA after cutting rates seems almost certain this month as much as any of these things can be certain, they’ll be able to continue doing that to some extent later in the year.

So Australia, we think, is extremely well placed in a sense. Both absolutely, but absolutely in a relative sense as well, if I can put it that way. Indeed, there’ll be sectors and industries that’ll be impacted. So, agriculture, including meat products, medical and pharma products, and some advanced manufacturing products, could be affected. And we’ve learned just overnight that the film industry could be affected by the tariffs that Trump has just announced. But let’s look at the overall picture. Australia’s goods exports to the US, excluding gold, represent only around 3% of Australia’s total exports of goods and services, and represent less than 1% of Australian GDP.

So, the impact on us directly seems relatively minor. The impact and the risk, as we’ve discussed before, are probably more related to China, given that China is our key, our major trading partner. In fact, 88% of our goods exports go to our Asian trading partners, including 43% to China.

So that is where the risk lies—the US-China relationship. It seems that the Chinese will really need to come up with more significant stimulatory policies to try to meet and ameliorate some of the effects that are likely to occur as a consequence of the tariff battle between themselves and the US.

So, I think that is where the risk for the Aussie economy lies.

Steve Hiscock:

Yeah. And you’re right about China. They’re going to have to stimulate. But regarding the extent of the stimulation, I would probably have thought we’d have to wait until they could work out exactly where the tariff landscape lies. And they haven’t started negotiations yet, have they?

Rob Hogg:

No, that doesn’t seem to be the case. There have been a few words and a few positionings, but I don’t think they’ve sat down around the table yet.

Steve Hiscock:

Okay. Moving on. You mentioned we’re likely to get an interest rate cut, which is good news. Does that mean inflation is under control in Australia?

Rob Hogg:

Well, it’s absolutely trending in the right direction, and it seems more likely than not to continue moving in that direction, particularly as we were saying, if we get this global disinflationary goods impact from China seeking out other markets for its exports. But of course, inflation here in Australia is driven more by the services sector and wages in particular. And look there as well; the trends are towards continued wage growth, but at a slower pace. So, a sort of a disinflation in wages. It seems that the downward trend in inflation (disinflation) will continue. And that gives the Reserve Bank the policy room to cut rates, and they could run cut rates more than expected, perhaps if global conditions deteriorate more than is currently expected. But they, like pretty much everybody else, are facing an enormous amount of uncertainty.

I know there’s been some talk about a rate cut of greater than a quarter of a per cent at their meeting later in May. Given the incredibly uncertain situation, I suspect they’ll continue at a pace of 25 basis points at their upcoming meetings.

Steve Hiscock:

Yeah, absolutely. The one great thing, and you’ve mentioned this a couple of times, about the higher level of rates that we have is the fact that it represents firepower, so they don’t want to spend all their firepower in one go. One would suspect so. But it’s good news for Australia that they’re likely to cut rates. And so, Rob, let’s finally wrap it up with an outlook about markets. Now this is an impossible question. I was listening to someone present on the US economy and the US market the other day. Their outlook was violently flat, which is an interesting way of putting it, stating that the volatility will be the key theme and the market will probably drift sideways. But I don’t know about that. I mean, one can’t help feeling that Ford is an example of how we are likely to see weakness ahead with the bad news that has yet to come out regarding US corporate earnings.

How do you see bonds, interest rates, and markets going in the next few months? Impossible question. Yes. But what are your thoughts?

Rob Hogg:

I quite like that—violently flat. Because of the volatility, earnings risk may well be highest in the US.

We had those anecdotes earlier on. But look, really importantly, the US equity market does not seem priced for recession. So if we start to see that, for example, employment growth evaporated or we started to see layoffs, I think we’d see an enormous change in market sentiment and the beginning of a pricing in a recession.

That type of outcome, which looks increasingly likely, is not priced into US markets, certainly not the US equity market. So, most risk probably lies there in the sense of what’s priced. Not much in the way of recession. And also that a recession does seem to be more likely to occur in the US than in other countries because, of course, the Fed there has this dilemma of inflation expectations, which have risen a lot this year as a consequence of tariff fears.

So they don’t have as much policy freedom. As the ECB would have in Europe, the Bank of England or the Reserve Bank would have. So, less potential firepower to reply. So the risk lies there, not priced for recession. As we were saying, there is still a potential downside risk from here in Australia. Look, market metrics still point to valuations at pretty high levels historically. So there’s risk there, but there’s more policy freedom here to do something about the economy if things start slowing down dramatically. So that’s significant as well. On bonds, the US could well trade a bit differently from the rest of the world; the US is facing an enormous budget deficit, which seems unlikely to go away anytime soon, particularly if the administration starts enacting tax cuts. So that will be a heavy weight, I think, on the bond market, and may well limit the extent to which bonds might rally or yields fall, if the US were to slow significantly. Here in Australia, there’s more room for bonds to rally, so yields will fall if the economy weakens. So we could see that in a scenario of weaker growth and lower inflation here in Australia, the bond market could outperform what we might see in the US.

Notwithstanding that global bond markets are portrayed as very tightly relative to each other. The outlook for the currency, and whilst currency outlooks are extremely difficult to judge, on measures I’ve seen, the US dollar seems to be pretty fully valued. That, together with the fact that a lot of the funding of the current account deficit has been into equities, US equities, and it seems investors now want a higher margin of safety, if you like. So a higher risk premium. From here, I think the path for the US dollar still looks a bit heavy.

Steve Hiscock:

Right. And so, just to summarise that. Rob, what you are saying, the way I see it, is that volatility will remain, that’s a given. But we’re unlikely to get a bear market in the US, you know, 20%, 25% retraction from peak.

Unless the US economy enters a recession, but if it does, the market’s not priced for it, right? So there is a chance that the market will certainly retest the lows we saw in April, isn’t there?

Rob Hogg:

Yeah, I think absolutely. So, the market has stepped down from its highs around February. But it wasted no time in rallying from its lows earlier in April. Once the talk about tariff delays took place. So, yes, I think you’re right. Some earnings’ downside has only really just begun to be priced for the US, so there is the possibility the market could retest its lows if we start to see numbers that point to a higher probability of recession in the US, not in the hard data yet. Still, it’s absolutely in all the leading indicators, the sentiment surveys, et cetera, et cetera. If the uncertainty continues, and we continue to see companies put off spending and hiring decisions, and we see households do exactly the same, a recession looks more and more likely. So, a retesting of lows remains a very real possibility.

Steve Hiscock:

The silver lining of that, Rob, is that there aren’t many times when good quality, growing companies offer reasonable pricing. So, for us as active managers, it is an opportunity over the next few months to pick up those stocks that are normally too expensive but that we believe are very high quality.

It’ll be interesting. Obviously, the volatility is going to continue, and there will be opportunities. So Rob, thanks very much for your time.

Rob Hogg:

Pleasure, Steve. As always. Thank you.

Steve Hiscock:

That brings us to the end of today’s podcast. April proved to be an incredible month, one of the most volatile months for a long time.

We looked at what it means for investors going forward, with the reality being that unpredictability and volatility are going to stay around for some time. We hope you enjoyed today’s episode. Please subscribe so you don’t miss out on future podcasts and follow us on LinkedIn, YouTube, Spotify, Apple, or wherever you get your podcast.

Please don’t hesitate to let us know if you have any questions or comments. Until next time, stay informed and stay active.

 

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Disclaimer:

This podcast is produced by SG, Hiscock and Company. It does not constitute financial advice and assumes a certain level of knowledge. It’s general information only and does not take into account the investment objectives, financial situation, or needs of any person and should not be considered a recommendation. For more information, visit: https://sghiscock.com.au/podcast-disclosures-and-disclaimers/.