Hopes of seeing Donald Trump roll back tariffs before they go live were dashed this morning—along with sentiment across global financial markets.
The Nikkei is down more than 2%, a Bloomberg index tracking Asian currencies fell to a record low, and European and US futures hint at another very, very ugly trading session, with losses between 2–4% at the time of writing. I won’t say much about yesterday’s rebound: moves of that magnitude – above 2–3% – aren’t sustainable unless there’s a clear resolution to the tariff problem.
China, on the other hand, is seeing limited losses across the CSI 300 companies. Despite being hit by 104% tariffs starting today, Chinese authorities said they will “fight to the end.” That likely includes massive and unprecedented measures to keep the economy afloat. One of them: letting the yuan weaken to absorb part of the tariff cost. The USDCNY has dropped to its lowest levels since 2007 this morning. Expect rate cuts, liquidity injections, and other measures to follow, one after the other, as China digs in.
And China isn’t alone in promising support. The Reserve Bank of India (RBI) and the Reserve Bank of New Zealand (RBNZ) cut their interest rates by 25bp each. Kenya slashed its own rates by 75bp, pointing to tariff policy, and the European Central Bank (ECB) is expected to cut by 25bp at next week’s meeting – and the next.
Politics, politics
Trump’s trade policies continue to weigh on the US dollar, on rising recession bets—the dumbest recession in world history, probably. The Federal Reserve (Fed) hasn’t yet given public support to investors; instead, Fed members tell US monetary policy is well-positioned to cope with tariff disruptions. But a deeper selloff could change their minds.
Naturally, Fed officials—like everyone else—are worried about the impact massive tariffs will have on the US economy. Right now, we don’t know who will pay for them. Will exporters absorb the majority of the costs to protect their US market share? That would be the dream scenario for Trump: US consumers untouched, government coffers filled, and a political win. Or will exporters pass costs on to US consumers, thinking this won’t last and better to seek new markets? In that case, US inflation will rise, leaving the Fed irritated—and forced to act.
The Fed could still help the US economy weather the shock, but inflation would inevitably hit the economy—and people—and eventually Donald Trump at the mid-term elections.
China, for one, seems to be betting on that: losing market share now while hoping Americans will be hardly hit by inflation to reconsider Trump. I’m no political expert, but if negotiations don’t produce a reasonable outcome for European countries, the most logical move may be to make peace with China, so everyone takes a softer hit. It’s a bizarre twist—given how high global geopolitical tensions are—but it’s up to politicians to be smart enough.
In FX, the dollar’s weakness pushes the EURUSD over the 1.10 mark again. Levels below 1.10 offer interesting dip-buying opportunities—especially if the global trade war intensifies, which it likely will. The euro could draw in some ‘safe haven’ flows. In fact, despite Europe’s own stimulus plans, German bunds are increasingly seen as an alternative to US Treasuries. The German 10-year yield has been dropping steadily since mid-March, while the US 10-year spiked from under 4% to over 4.50% in just three sessions. The US 30-year hit 5% a few hours ago as companies are selling their liquid assets while investors simply don’t want to take the risk.
There are also rumours that China may be dumping US Treasuries in retaliation. All in all, the rising financial stress may require Fed intervention in the coming hours or days. But in the longer run, if the US isolates itself, the global ‘safe haven’ balance could shift—and Europe might benefit.
One hope is that the US resolves this from within. Elon Musk called Peter Navarro “truly a moron” and “dumber than a sack of bricks,” while Republican Senator Tillis asked, “whose throat do I get to choke if this turns out to be wrong?”
While they’re looking for someone to blame… a potential replacement of US Treasuries by gold—by China and other central banks—could partly explain gold’s rally past the $3,000 mark. Gold is well bid this morning amid the fire and dust.
US crude, on the other hand, traded below $57pb this morning as the escalating trade war hammers global growth prospects. The outlook remains negative. The next natural target for the bears is the psychological $50pb level.
