Happy Sunday from Copenhagen, if I am allowed to say that after a horrendous week in markets. 

Markets are heading into a tense week as the U.S.-China trade tensions escalate and Europe appears poised to introduce digital tariffs — likely targeting the Magnificent 7 — in response to Trump’s proposed tariff agenda. By late Friday, the U.S. dollar surged sharply, accompanied by early signs of capitulation in traditional safe-haven assets like gold and Treasuries. This price action suggests that hedge funds may already be under pressure to raise liquidity.

If the dollar strength persists, cross-currency basis swaps are likely to move further in favor of the USD, with continued selling pressure on gold and Treasuries — increasing the risk of a broader liquidity squeeze.

We’ve already seen a 0.75 standard deviation deterioration in global liquidity — roughly 40% of the magnitude experienced during the March 2020 lockdown-driven selloff.

Chair Powell’s comments on Friday added to the risks, as he emphasized “patience” due to continued uncertainty around inflation. Given the current data, that stance seems increasingly out of touch — and may come to be viewed as his own “we’re not here to close spreads” moment, echoing Lagarde’s infamous misstep in March 2020 before she pivoted to aggressive QE shortly thereafter.

Here’s how to assess whether we’re in the midst of a liquidity event or crisis.

Chart of the week: Global liquidity has made a 0.75 std-dev move last week