Mayhem in markets
“Manic Monday” is an apt description of yesterday’s trading in markets. US equities oscillated between steep losses and modest gains – the latter triggered by a social media post saying Trump would pause his “reciprocal” tariffs for 90 days, which was quickly denied – before ending flat to marginally lower on the day. US bond yields closed sharply higher, having been considerably lower at one stage, accompanied by some further recovery in the dollar. The euro is currently trading at about $1.0970, down around 1.5 cents from last week’s high of over $1.11 and not much more than a cent above where it was trading immediately prior to Trump’s “Liberation Day” announcement on 2 April. Similar to previous periods of turmoil in global financial markets (e.g. the unwinding of the yen carry trade in early August last year), sterling has underperformed during this latest episode. It has fallen to around £1.2780 against the dollar, down more than four cents from last week’s best levels, and has slipped to just shy of £0.86 vis-à-vis the euro, down almost 3p in a week.
Asian equity markets have partially recovered from yesterday’s plunge, led by Japan’s Nikkei index which is up about 6% overnight, while European stocks have opened in positive territory this morning (+1%) having shed more than 4% yesterday. In bond markets, US 10-yields closed almost 20bps higher and are now back above their pre-tariff announcement levels, while equivalent UK and German yields rose by 15bps and 5bps respectively. In terms of expectations for central bank rate cuts, the market is pricing in about 100bps for the Fed by year-end, pared back from around 125bps at one stage yesterday, and a bit more than 75bps for both the ECB and Bank of England.
In remarks yesterday, Donald Trump denied he was considering pausing tariffs but indicated he was open to negotiations with trading partners, saying he is willing to do a “fair deal and good deals with every country.” Meanwhile the EU has indicated that it will not be rushing to retaliate to Trump’s tariff of 20% on its exports to the US, which will allow for further talks in the meantime, but it will be responding to tariffs on steel and aluminium by imposing a 25% tariff on some goods imported from the US (though this will now be less than the EUR 26bn in total previously planned).
The sentix index of investor economic confidence for the Euro area fell sharply this month according to the latest survey – obviously related to Trump’s tariffs – more than reversing the increase that followed the announcement of increased infrastructure/defence spending in Germany. Economic expectations for the eurozone declined particularly sharply, recording the second sharpest fall in the history of the survey.
Looking to the day ahead, it is very quiet in terms of economic data. The only release of note is the small business optimism index in the US, which will provide an indication of the mood in this sector of the economy in response to the tariffs announcement.