Markets rebound amid tariff turmoil and recession fears
Late on Monday, and then going into Tuesday, global equity markets staged an impressive comeback. It looks as if investors are reloading on the long side following yesterday’s dramatic market action which appeared to round off a frenetic sell-off. This followed Trump’s reciprocal tariff announcement last Wednesday.
A look at yesterday’s ‘scores on the doors’ showed losses of 0.9% for the Dow and Russell 2000, a slight dip of 0.2% on the S&P, and even a modest gain for the tech-heavy NASDAQ. But these numbers belie the panic and carnage that overtook the markets.
The S&P may have closed at 5,062, but that hides the fact that the futures traded at 4,795 (their lowest level since January last year) in the morning, before hitting 5,249 later that afternoon.
Indeed, the S&P rallied over 400 points (8.6%) in 35 minutes soon after the US open. This was the result of an incorrect report that President Trump was postponing all tariffs (except those on China) for 90 days.
This is an indication of the kind of madness that has overtaken markets, with the kind of intra-day moves last seen at the height of the Covid pandemic five years ago. There was just as much volatility across bond markets.
The yield on the 10-year Treasury fell below 3.90% (a six-month low) before it surged later in the day to hit 4.14% - its biggest one-day move in a year. Fed Chair Jerome Powell delivered a speech in which it was clear that the US central bank was not looking to intervene in such an uncertain environment.
This is understandable given the fluid nature of the current situation, which can change in an instant due to a seemingly random comment from the president, or members of his team.
Despite this, markets are predicting between three and four 25 basis point rate cuts from the Fed before year-end, down from five yesterday morning. This suggests that fears of a tariff-led economic slowdown ‘trump’ those of a tariff-led jump in inflation.
It seems clear that President Trump is not going to back down on his randomly-calculated reciprocal tariffs just because markets are suffering conniptions. That would make him look weak. He also reacted aggressively to China’s own reciprocal tariffs on US imports by upping levies on Chinese goods.
These are now at such ridiculous levels that they don’t make practicable sense. Overall, it’s understandable that the US would want to level up trade through tariffs. But Trump’s approach is so scattergun, his targets so bizarre, the size of tariffs so egregious and the aims so opaque (fentanyl, migration, fairness?) In the absence of some tariff clarity and defined purpose from the White House, and soon, the Trump administration is in great danger of losing control.
If markets perceive this, which they are close to doing, then the derisking will continue. If so, then the danger is that something fundamental to the financial plumbing breaks. That is not a risk that anyone should be taking with the global economy. Particularly given the parlous geopolitical state the world is in currently.
