Daily Brief Macro: HEM: Dovish Prices Deranged and more

• Despite concerns, activity continues to be robust with stable manufacturing and tight labour markets.
• There is a persistent issue of high underlying price and wage inflation.
• The Bank of England’s rate cut ahead of the Federal Reserve is seen as highly irrational, as rates do not reflect the rebounding risk sentiment.

• Morning from a sunny Copenhagen! Many pundits have (rightfully) struggled to find a coherent logic behind the Trump administration’s trade policy.
• However, quietly—but increasingly noticeably—the administration is beginning to make progress on a few of the core objectives outlined in the so-called “Mar-a-Lago Accord.” This accord seeks to leverage the U.S. defense umbrella to compel major trade partners to accept:a weaker USD, and increased purchases of U.S. Treasuries (USTs) in exchange for continued security guarantees—  with tariffs serving as the primary tool in this negotiation strategy.
• While this approach has clearly sparked outrage globally—and while one can certainly question the strategic coherence and execution—the first signs are emerging that suggest it might be achieving some of its intended effects.

• April 2025 saw extreme market volatility after President Trump announced sweeping reciprocal tariffs, mainly aimed at China.
• Subsequent delays and complex exemptions fueled market swings, sparking fears of recession and inflation. First quarter 2025 US GDP contraction is not a trend.
• Despite headline risks, deeper analysis suggests a more balanced global economy over the longer term. Both China and the US will do whatever it takes to avoid a recession

• Since the start of its operations on 4 March, Nextrade (NXT) has rapidly gained its market share to nearly 25% of the total equity trading value in Korea.
• Although retail investors account for about 95% of total trading value at NXT, there is a growing interest in more institutional investors trading through the Nextrade exchange.
• High frequency traders as well those trying to capitalize on lower trading transaction fees and alpha generating trading events/news flow in after hour markets are increasingly trading on the NXT.  

• A review of recent events/data impacting our investment themes and outlook
• Regime change comes to Asia, making sector selection key to performance
• Some key recession watch indicators  continue to ring alarm bells

• Asia’s base oils prices extend rise vs feedstock/gasoil prices.
• Sustained strength of base oils margins points to limited surplus supply even as firm prices incentivize refiners to boost output.
• Limited surplus supply at end-Q1/early-Q2 2025 follows seasonal rise in demand and heavy round of plant maintenance.

• Hold onto Vietnam positions – the economy has held up and the country will negotiate a trade deal with the US. It has no choice but to buckle. 
• Vietnam’s trade deficit with the US is the fourth largest and the US accounts for 30% of exports.  Trump will force it to lower tariff rates, tighten rules of origin. 
• But Vietnamese companies aren’t re-locating to the US, there are no critical industries for Trump to target and the US cannot wean itself of Vietnam’s cheap low value-added consumer goods.

• Europe Group III base oils price trends higher vs prices in US and Asia over past two months.
• Europe Group III price trends higher vs domestic Group I price and VGO, holds firm vs domestic Group II price.
• Europe’s firmer Group III price differentials could reflect correction following sustained weakness.

• Global base oils prices extend rise vs feedstock/competing fuel prices.
• Outright prices mostly hold firm or rise even in face of ongoing dip in crude oil/diesel prices.
• Contrasting trends point to stronger base oils fundamentals relative to crude/diesel.

We will be publishing our 1st Quarter 2025 Letter to Investors next week, the following is an excerpt from that letter:

As we noted earlier this year, we believe, along with many others, that we are now in a period in which investing from the position of political and geopolitical naivety has ended. As such, what has worked in markets is unlikely to work in the future.

This transition has been years in the making. Still, a confluence of events in recent years, starting with COVID and ending most recently with a rollout of an effort by the US government to reshape global trade, has sharply accelerated the transition.