It is fair to say this has been an unprecedented week in markets, with tariffs leading to once-in- a-generation moves. On Wednesday, a week after “Liberation Day”, US President Donald Trump announced a surprise 90-day pause in tariffs. This led to a huge relief rally, as we saw US equity markets experience their best trading day since 2008. We will try and unpack what happened in this rollercoaster week below – brace yourself for the regular use of the word “tariffs”!
We wrote about Liberation Day in the last weekly and its impacts on the markets, causing chaos across the globe. We had seen multiple days of US equities selling off and this week there was rising pressure on bond markets and the US Dollar. There really were not many hiding places as Europe, UK and Japan markets also bore the brunt of the pain. With no regard for the markets disarray, Mr Trump began the week stating, “everyone wants to come and make a deal”. He claimed offers had been presented to him that never would have happened but for the moves he made. Ironically, such countries may not have been forced to make such deals if they hadn’t been hit with excessive tariffs.
There were murmurs around the White House on Monday that a 90-day pause could be on the cards; however, these were taken with a pinch of salt. We then saw the big U-turn come on Wednesday as Mr Trump announced that the retaliatory tariffs on countries (excluding China) would be postponed for 90 days. In totality, countries are still dealing with the initial 10% tariffs rate, with the exception of China, but markets reacted positively to the news. By close on Wednesday, the S&P had risen 9.5%, it’s third-best day since 1950. The technology-heavy Nasdaq index rose over 12%, adding $2 trillion in market cap as Nvidia, Apple and Tesla shares all surged over 10%. It looks as though Trump had to backtrack due to pressure from the bond markets. The disorderly sell-off in US Treasuries, if left to continue, would have widespread negative impacts on the US economy, and as such Trump likely bowed to this pressure. Much like Liz Truss found in 2022, you do not mess with the bond market!
While Wednesday’s relief rally was needed, this does not signal the end to the trade war, as Canada and Mexico are still subject to the 25% tariffs rate, and China have been hit the hardest with tariffs increasing to 125%. The Chinese Yuan fell to its weakest level in over 17 years to 7.34 versus the Dollar, causing the Chinese Central Bank to step in. Markets have estimated the impact of the tariffs could lead to China’s exports to the US almost halving in the next few years, a big blow to China’s GDP, which may fall by 1.5%. Mr Trump stated a resolution with China was certainly possible; however, China continue to match Mr Trump tit-for-tat, announcing their own 125% retaliatory tariffs.
The 90-day reprieve is certainly not a time where government officials intend to sit on their hands and do nothing. European Finance ministers have come together to attempt to reach a trade deal with the US. The EU economy is forecasted to grow under 1% this year so the continuation of tariffs poses potential recessionary risks. US tariffs are already in place on the automaker industry and EU officials are ready, to resort to “response mechanisms” if a resolution cannot be found. UK automaker Jaguar Land Rover has initiated a halt in shipments to the US for a month as they consider how to mitigate the costs of tariffs and potential rerouting.
In terms of economic data, it has actually been a positive week. US CPI figures for March unexpectedly fell below market expectations to 2.4%. Consensus forecasts were for a fall to 2.5% amid lower fuel prices. Month-on-month, the inflation rate was -0.1%, again below market forecasts of 0.1%. Core inflation fell below the 3% mark to 2.8% (year-on-year). Rising airline and hotel prices had been key contributors to the reacceleration in inflation to end last year; however, both sectors fell 5.3% and 3.5% for the month respectively, as we are seeing the turn in consumer discretionary spending driven by weakening consumer sentiment.
UK GDP figures for February were released this Friday morning, showing the economy grew by 0.5%. Unexpectedly, market forecasts had predicted slight growth of 0.1%, however, there was growth across all sectors, including the manufacturing sector which has been weak of late. There is certainly a lot more for the Labour party to do to continue improving the UK’s economic prospects, as consumers this month face “Awful April” with price increases on energy, water and council tax bills.
We move to news of actual rollercoasters, as Universal Studios announced they will open their first European theme park in England. In a deal set to bring an estimated £50 billion to the UK economy, the theme park will be constructed and open by 2031 in the town of Bedford. Approximately 20,000 jobs will be created during the construction process with a further 8,000 in hospitality once open as 8.5 million visitors are expected within the first year. A win for the Labour party as PM Kier Starmer proudly announced the plan for growth and bringing joy to Britain.
This week will likely go down in history with incredible daily swings in market prices. Trying to trade these markets is fraught with danger, and sometimes the best approach is to do nothing, as difficult as that can be. We’ve already witnessed this week the incredible rallies that can occur on good news, and over the course of the next few months there is the potential for tariff deals to be made, and for central banks to step in and assist.
We’ll finish on a quote from the Democratic political strategist James Carville in 1994 who sums up the power of the bond market:
“I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”
Nathan Amaning, Investment Analyst
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