Trade War

What Happened?

Markets sharply retreated as investor sentiment turned decisively risk-off following remarks from Federal Reserve Chair Jerome Powell. The S&P 500 fell by 2.2%, while the Nasdaq Composite—a tech-heavy benchmark—suffered a steeper 3.0% decline. Powell expressed concern that recent tariffs implemented by President Trump’s administration had been “significantly larger than anticipated,” and warned they could fuel persistent inflation. This, he added, may complicate the Fed’s ability to support growth, potentially placing monetary policy in a constrained position. The cautious tone signaled a shift from earlier Fed communications that described tariff-driven inflation as "transitory."

In a significant move that amplified market stress, the U.S. government imposed new export restrictions on AI chipmaker NVIDIA, targeting shipments to China. This policy shift is seen as a new flashpoint in the ongoing U.S.-China tech and trade rivalry. NVIDIA’s shares plunged 6.9% after it revealed that compliance with these restrictions on its H20 chip would result in a USD 5.5 billion charge. AMD also echoed concern, estimating a hit of up to USD 800 million. Safe havens rallied: gold surged 3.6% to USD 3,334/oz, U.S. 10-year Treasury yields fell by 5 basis points to 4.28%, and the dollar weakened against the euro, with EUR/USD rising 1% to 1.14.

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What Do We Think?

Despite escalating tensions, we at Aura Solution Company Limited believe that a pragmatic resolution between the U.S. and China remains likely. Trade war cycles historically follow a pattern of escalation followed by tactical retreat and renegotiation. President Trump has publicly stated he would “love” to reach a deal with China, suggesting flexibility remains. In our view, after initial market turbulence, both sides will likely seek to restore a trade equilibrium—especially in light of mutual economic exposure. We expect average U.S. tariffs on Chinese imports to stabilize around 34%, with a broader tariff rate of 10–15% globally, excluding primary partners like Canada and Mexico.

Chair Powell’s cautious remarks shouldn’t be interpreted as closing the door on rate cuts. His comments likely reflect a strategic pause, allowing policymakers to assess tariff impacts more fully before acting. Aura anticipates that the Fed will be responsive if growth falters—especially in the labor market, which remains the key variable. Should layoffs increase meaningfully, the Fed would likely pivot. Our base case expects a cumulative rate cut of 75 to 100 basis points before year-end, reaffirming our belief that monetary flexibility remains intact.

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How to Invest

In this uncertain environment, investment decisions should be guided by discipline, scenario planning, and portfolio resilience. Market volatility is likely to persist until clearer direction emerges on tariff policies and U.S.-China relations. Investors should embrace a tactical yet diversified approach, making use of volatility as an opportunity rather than a threat. Below are key strategies recommended by Aura’s global strategy team:

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1. Take Advantage of Volatility

Increased volatility, while unsettling, often precedes periods of above-average returns. We recommend phased entry into equity markets, especially for those underinvested. Averaging-in over multiple tranches allows investors to reduce timing risk and build exposure to sectors positioned to rebound once clarity improves. Our models continue to rate U.S. equities as Attractive, based on robust earnings, innovation leadership, and structural support from fiscal policy. However, caution is warranted, and diversification remains paramount. Investors should prioritize sectors less exposed to geopolitical crossfire, such as industrial automation, domestic infrastructure, and select consumer staples.

2. Allocate to Gold

Gold continues to fulfill its traditional role as a safe-haven asset in times of political and economic stress. With the metal recently touching an all-time high of USD 3,334/oz, its performance underscores broad investor concern over inflation and macro instability. Gold is up approximately 26% year-to-date, reflecting both defensive flows and weakening real yields. We maintain a bullish outlook, projecting that gold could reach USD 3,500/oz by year-end, driven by sustained inflation concerns, central bank accumulation, and geopolitical instability. Investors should consider maintaining a 5–10% allocation to gold in multi-asset portfolios for volatility buffering.

3. Diversify with Hedge Funds

Hedge funds, particularly those using discretionary macro, equity market neutral, or multi-strategy approaches, offer flexibility during market dislocations. These strategies can dynamically reallocate capital based on shifting macro conditions, allowing for downside mitigation without overcommitting to a directional market view. Multi-strategy funds, in particular, combine low correlation with opportunistic alpha-seeking, which is well-suited to the current environment. That said, hedge funds also come with liquidity constraints and opaque risk profiles, so investors must apply rigorous due diligence. For qualified clients, they remain a valuable diversification tool in the era of policy unpredictability.

4. Seek Durable Income

Fixed income remains a critical component of defensive positioning. Despite recent instances where equities and bonds declined in tandem, historical correlation dynamics suggest that high-quality bonds will regain their role as portfolio stabilizers. U.S. Treasuries, investment-grade corporates, and municipal bonds offer attractive risk-adjusted yields in the current rate environment. With inflationary pressures likely to be temporary in nature (despite tariff noise), we expect the Fed to remain responsive, anchoring long-term rates. Investors seeking durable income with lower capital volatility should consider extending duration modestly while avoiding high-yield or speculative debt instruments for now.

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Conclusion

The renewed trade tensions between the U.S. and China—amplified by Fed commentary and export controls on strategic technologies—have triggered a marked return of risk aversion. Markets are in a period of recalibration. However, we caution against emotional reactions or binary positioning. Aura’s framework emphasizes strategic patience, intelligent allocation, and long-term clarity amid short-term noise. Opportunities will arise for disciplined investors—particularly in U.S. equities, gold, and select alternatives. Our teams continue to monitor developments across Washington, Beijing, and the Fed to provide our clients with precise, high-quality intelligence and allocation strategies.

Volatile Times

Strengthening Portfolios in Volatile Times | Aurapedia | Aura Solution Company Limited

In this CIO Update, we present our upgraded outlook for U.S. equities, outline strategies to strengthen and diversify portfolios amid market volatility, and provide revised scenario-based guidance following President Trump's 9 April announcement of a 90-day tariff reprieve on most countries.

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US Equities Upgraded to ‘Attractive’

We now classify U.S. equities as Attractive, based on three core observations:

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1. Policy Reversal Reduces Tail Risks
   President Trump’s recent tariff suspension follows a period of escalating trade tensions, notably after the 2 April “Liberation Day” announcement that raised U.S. tariffs on Chinese imports to 145%. However, the subsequent 90-day pause on reciprocal tariffs for non-China trade partners marks a significant de-escalation.

   This action signals a heightened sensitivity from the administration toward market turbulence—a possible informal "Trump put"—indicating that market feedback may temper policy severity moving forward.

2. Risk of Systemic Downturn Decreases
   While the China tariffs remain economically disruptive, we believe systemic crisis risks have moderated. Consequently, we revise our downside S&P 500 target upward to 4,500 (aligned with a typical recession), from a previous low of 4,000 (representative of a financial crisis scenario).

3. Post-Volatility Returns Tend to be Strong
   Historically, high volatility environments have preceded above-average market gains. With the VIX surpassing 50, and the S&P 500 rebounding 9.5% on 9 April—its largest single-day rise since 2008—precedent suggests significant return potential over the next 12 months. Since 1950, similar rebounds have been followed by consistent and notable gains.

Moreover, investor sentiment remains exceptionally bearish—typically a contrarian indicator. The latest AAII survey shows 58.9% of investors expect further declines, increasing the potential for upside surprise.

Strategies for Navigating Volatility

“Phasing-In” Strategy

We advocate for gradual market entry via phasing-in to balanced portfolios. Since 1945, such strategies have outperformed cash in 74% of 1-year periods and 83% over 3 years—especially when initiated after a market correction of over 10%.

Capital Preservation Instruments

Structured notes and capital preservation vehicles using zero-coupon bonds and call options can offer upside equity participation while limiting downside. These tools may suit investors seeking gains but wary of short-term volatility.

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Gold as a Strategic Hedge

Gold rebounded to USD 3,176/oz as of 10 April and continues to serve as a strong hedge amid trade uncertainty and dovish central bank expectations. We forecast gold prices reaching USD 3,200/oz in our base case, driven by geopolitical risk, inflation hedging, and lower real rates.

High-Quality Bonds

US Treasury yields at 4.42% present attractive entry points. We target a 4.0% yield by year-end, with potential for significant capital appreciation should downside economic scenarios materialize. In recessionary conditions, yields may fall to 2.5%.

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Hedge Fund Strategies

Discretionary macro, equity market neutral, relative value, and multi-strategy hedge funds offer dynamic exposure and downside protection. While illiquidity and transparency challenges persist, the current macro backdrop favors adaptive, alpha-seeking approaches.

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Scenario Analysis – April 2025 Outlook

Base Case – 50% Probability

• S&P 500 Target: 5,800

• 10-Year Treasury Yield: 4.0%

• Macro Expectations:

  • Equities rise amid sectoral trade agreements and central bank rate cuts.

  • The U.S. economy grows sub-1% in 2025; unemployment remains below 5%.

  • Effective tariff rates settle at ~10–15% ex-China; ~34% for China.

  • Fed cuts rates by 75–100bps; ECB cuts 25bps per meeting until mid-2025.

Downside – 30% Probability

• S&P 500 Target: 4,500

• 10-Year Treasury Yield: 2.5%

• Macro Expectations:

  • Tariff talks fail; global trade deteriorates; U.S. enters mild recession.

  • Tariffs ex-China rise to 15–20%; U.S.-China tariffs stay >60%.

  • Fed eventually cuts rates by 300bps to offset recession impact.

Upside – 20% Probability (details in upcoming bulletin)

• We will provide further insights in the next CIO Alert, focusing on best-case outcomes including robust trade resolutions, strong earnings rebounds, and policy stimulus.

Conclusion

Market dislocations present opportunities for investors who remain disciplined. Through diversification, strategic positioning, and phased engagement, investors can enhance portfolio resilience and benefit from the eventual stabilization of global trade dynamics. While the path may remain uneven, the medium-term trajectory favors recovery and growth.

Aurapedia | Aura Solution Company Limited remains committed to delivering forward-looking guidance grounded in rigorous macroeconomic insight and real-time market analysis.