Trump reverses course on tariffs

Trump reverses course on tariffs, and stocks surge

• Let the rally commence: the news that Trump has sanctioned a 90-day pause on tariffs for non-retaliating countries is causing US markets to surge. The Nasdaq is higher by 8% and the S&P 500 is up by 5%. This is not quite reversing the losses of recent days, but it does mean that both indices are out of bear market territory. AT one point, 499 stocks on the S&OP 500 are rallying after this announcement, which highlights how much of a driver tariffs have been for markets in recent days.
• The latest turn in President Trump’s trade saga means that the UK will benefit from the pause, however, the EU may not since it announced a small number of retaliatory tariffs on US imports earlier on Wednesday.
• Never one to lose face, President Trump has slapped a 125% tariff on all Chinese  imports to the US, that is effective immediately.
• There could also be more sector specific tariffs announced in the coming days, such as on healthcare and pharma imports. The healthcare sector is still lagging other sectors on the S&P 500, even though all sectors of the S&P 500 are rallying.
• Bond markets are having a wild ride. Price action has turned 180 degrees: short term bond yields are rising, and longer-term yields are falling, reversing the price action of the last 2 days.
• We expect the same in the UK on Thursday, as long as Trump doesn’t reverse course on the pause overnight.
• We expect that some of the excess central bank rate cuts that have been rapidly priced in for the UK, euro area and the US to get reversed on the back of this news, which could boost the dollar on Thursday, as it has been under pressure this week.
• Will this reversal in course from Trump help UK based hedge funds to avoid collapse? It may well do, and we have not heard that there have been any big victims from this crisis as yet.
• However, some suffered heavy losses, according to the BOE, especially on UK leveraged sovereign bond bets, which could have jeopardized their financial position, so it’s still worth watching them closely.
• If the sharp rise in UK long term bond yields is reversed on Thursday, then we don’t think that it will have a long-term impact on the UK economy or financial system. Instead, it will be seen as a short term blip.
• Likewise, UK mortgage rates were unaffected, and UK mortgage lenders actually slashed mortgage rates this week, due to the recent drops in UK sovereign bond yields.
• The news on a pause in tariffs is exceptionally good for global risky assets and for global economic prospects.
• However, it is only kicking the can down the road. The market needs to see progress made on cutting deals to ensure that tariff levels are lowered, and fairness prevails.
• To re-cap: the pause on tariffs is without a doubt good news for risky assets. Expect stocks to in Asia and in Europe to follow the US and stage a strong recovery on Thursday. Tech and other heavily sold areas of the market should lead the way, for example, Nvidia is higher by 13%, and Meta is higher by 9%. Even Apple and Amazon are both higher, even though they are dependent on Chinese imports for some of their business. This could be a sign that the market is ready to price in a thawing in Trump/ Xi relations, even though tariffs on Chinese goods are now at laughable levels.
• Commodities and oil could also rally, and the gold price could fall. Treasuries and UK Gilts are expected to recover at the longer end (10-year) and sell off at the short end (2-year), as interest rate cuts that were priced in at the peak of the panic sell off in recent days are priced out of the market.
• It’s another historic day for markets, but things could stabilize from here.