...weeks ago this thread has warned you of a European exodus from the US.
...and I cited four good reasons why it has become compelling for them to do so
1. US market is overvalued, and the Europeans had been overweighted in the US, so time to get out and lock in profits when headwinds arrive
2. A falling dollar and well publicised Trump 2.0 preference for a lower dollar is good enough reason for them to flee, to avoid double whammy from falling US asset value combined with a lower dollar, which is occurring now in real time
3. Trump 2.0 economic and geopolitical policies are inherently antagonistic and has led to substantial alienation
4. A new promising European renaissance is emerging as Germany sheds its conservatism to step up fiscal spending on defence in an unprecedented manner, which led European stocks outperforming US.
This market metric shows the sell-off is getting scary
The plunge on Wall Street was breathtaking. But there is one indicator that investors should really be worried about.
Apr 4, 2025 – 8.16am
There’s one indicator that tells you just how scary the sell-off on Wall Street was on Thursday night following US President Donald Trump’s declaration of a tariff war.
No, it’s not the 4.8 per cent decline in the S&P 500, the most important proxy for risk assets in the world. Thursday was Wall Street’s worst day in almost five years, wiping more than $3 trillion off American markets.
No, it’s not the 32 per cent increase in the so-called “fear index” in one day. The VIX volatility index surged back to levels not seen for 2½ years.
No, it’s not the 3.2 per cent fall in the 10-year US Treasury yield, which fell to 4.06 per cent in an unusually large one-day move.
No, it’s not the 6.7 per cent fall in oil. Or the 5 per cent fall in bitcoin. Or the 4.6 per cent fall in copper.
Instead, it’s the plunge in the US dollar. Bloomberg’s gauge of the American currency fell by as much as 2.1 per cent on Thursday night – the largest fall on record.
That sort of movement is unusual enough in and of itself, but it has wrong-footed the market at the worst possible time, in the worst possible way. Fleeing US risk assets
The expectation was that Trump’s trade war would send the greenback higher for three reasons: the tariffs would hurt the rest of the world more than it hurt the US, they’d stoke inflation fears (pushing up bond yields, making the US dollar more attractive) and they’d push traders back towards a traditional safe haven.
But the fact that the US dollar has gone in the other direction sends a very worrying signal: investors are fleeing US risk assets.
That might seem like an obvious thing to say given the fall in Wall Street equity markets. But as Deutsche Bank currency guru George Saravelos argues, the US dollar is being hit by a perfect storm. That is, a loss of confidence in the US policy agenda (no surprise) and an expectation that the nations that America is hitting with its tariffs are going to be forced to launch big fiscal stimulus that the US won’t match.
“But given the dramatic nature of the moves, we are becoming increasingly concerned that the dollar is at risk of a broader confidence crisis,” Saravelos says.
Already, the safe haven properties of the dollar are being eroded, and that risks big losses for those holding unhedged US dollar holdings. Deutsche Bank estimates European losses on US assets are now exceeding those seen during Wall Street’s last bear market in 2022. Australian parallels
A similar story may be unfolding in Australia. As The Australian Financial Review’s market guru Jonathan Shapiro has written extensively, this includes Australia’s superannuation funds. They have tended to leave a large portion of their US dollar-denominated assets unhedged on the theory that the Australian dollar usually falls at times of crisis. But this time, even the Australian dollar has strengthened against the greenback.
What Saravelos fears is a loss of confidence in the US dollar that becomes disorderly at a time when most of the developed world is long US assets. Remember, American stocks make up 70 per cent of the MSCI World Index.
“All of this risks a self-fulfilling unwind of extreme US asset overweights from countries that have exported capital to the US over the last decade,” Saravelos says.
“Most of the developed world belongs to this category. At the end of the day, the US has a large current account deficit, and the currency is reliant on capital inflows for stability. A drop in the dollar, a drop in US equities and a rise in term premium in US Treasuries would be the strongest market signal that a process of US disinvestment is accelerating. A rise in term premia on US treasuries has not materialised yet, but it would be a very negative signal if it did.” Jobs data looms
The US dollar fall and the sudden exodus from America by investors is hitting Wall Street’s most important and most profitable stocks the hardest. An index of the magnificent seven tech stocks – Apple, Amazon, Alphabet, Meta Platforms, Microsoft, Nvidia and Tesla – plunged 6.9 per cent on Thursday night, and is now down 24 per cent since late December. Apple, which relies heavily on foreign manufacturing, plunged 9.2 per cent.
One of the most worrying aspects of the sell-off on Wall Street last night was that it accelerated towards the end of the session. Friday night brings another pain point: the release of US jobs data.
If those numbers are soft, and recession fears spike, then the toxic mix of tariffs, a sliding US dollar and plunging US tech stocks will send the market even lower.
