Markets in meltdown as Trump’s tariff plan triggers widespread selloff

WHERE WE STAND – Everything, everywhere, all at once. That’s probably the best way that I can describe market action over the last 24 hours or so.

From Shock, To Panic, To Now Chaos

Stocks down, bonds down, dollar down. It feels like we’ve gone from shock, to panic, via a mini relief rally, to now worrying that the speed of recent market moves might’ve broken something under the surface.

All of this, every single market move, of course,  is the result of a huge, obvious, self-inflicted policy mistake that one orange bloke in the White House will almost certainly be too stubborn to reverse.

We did kick things off yesterday with a dead cat bounce in the equity complex, with sentiment initially looking somewhat steadier, and European indices closing in the green. That fizzled out rather quickly, though, with major Wall Street benchmarks again notching chunky declines, and futures extending those losses to the tune of another 2% overnight. It goes without saying that uncertainty on the global trade front remains at ridiculously elevated levels. Accurately pricing risk remains essentially impossible.

Intraday vol, clearly, remains at a ridiculously high level with the S&P having now traded in a >5% high-low range for 4 straight sessions, for just the fourth time in the last four decades. Those other occurrences – 2020, 2008 & 1987 – not exactly historical parallels that folk look back on fondly.

Fundamentally, it will be tough to turn bullish unless and until the Trump Administration begin to either make policy in a coherent manner, strike a less hawkish tone on the whole tariff issue, or begin striking country-by-country deals to rollback ‘reciprocal’ tariffs.

Unless, and until, any of that happens, market participants must continue to price sizeable upside inflation and downside growth risks, while also remaining alert to the possibility of tensions escalating at any given time, given the elevated potential for retaliatory measures across the globe. Naturally, the longer tariffs remain in place, the greater the downside risks to economic and earnings growth will be.

Furthermore, as I’ve said before, a much more protectionist USA, and rearrangement of the global trading order, is not the sort of event that markets can discount and move passed in a few sessions, and is instead a shift that will probably take months for markets to fully digest, as the full economic implications of those tariffs becomes clear. If you reckon the S&P at 5,000(ish) has fully discounted a prolonged 104% tariff on Chinese imports, then I have a bridge to sell you.

Fundamentally, stocks are still crying out for a Trump pivot in order to engineer a more durable rally. Right now, such a pivot still seems a distant prospect, though that won’t stop folk clutching at straws in the meantime as the tariff to-and-fro continues.

What really worries me right now, though, is the action that we see across the Treasury complex, where there’s been no let-up whatsoever in selling pressure at the long end of the curve. Having risen 15bp during yesterday’s session, benchmark 30-year yields have climbed another 20bp to trade north of 5.00% as I write, with 10s following this similar vertical trajectory higher. That sees us trade about 70bp higher (in 2 days!!) compared to where the market begun the week.

There are a hell of a lot of potential explanations here, but the most worrying development is of course the cratering in swap spreads which, coupled with a ropey 3-year sale yesterday, point to a real lack of desire to hold Treasuries right now. Whether this is participants selling down Treasuries to raise cash in order to meet their liquidity needs, or a representation of how institutional confidence in the US has continued to be eroded, remains to be seen.

Either way, the short-term is downright scary with Treasuries selling-off this aggressively in line with equities, and market dislocations popping up all over the place. The longer-run is also worrying, particularly with the impending recession set to start with a 7% budget deficit, that will then surely only widen.

The big worry here is that this has now gone from a story of de-risking over tariffs, to one where the violent nature of recent market moves appears to be draining capital, draining liquidity, and creating structural issues of its own. Of course, all of this is self-inflicted, and by virtue of choices that President Trump has made, though it is nonetheless making Fed Chair Powell’s resolute remarks on Friday that they wouldn’t be riding to the rescue appear rather tone deaf, though he does have a near-impossible task right now.

I wonder if the strike price for the Fed Put is inching closer, if only from a financial stability perspective. That said, I’m not entirely sure that the Fed can do much right now besides smoothing market functioning – you can throw as much liquidity, and as many rate cuts, as you like at the market, but tariffs are a fiscal policy problem that only a U-turn from the man in the White House can solve.

As for hiding places, I guess gold is the only real hedge in this sort of environment, though even there we see participants trimming exposure in order to raise cash. That said, buying on dips around the $3,000/oz mark probably isn’t the worst idea. The JPY and CHF could be decent enough hiding places as well.

Other potential hedges include long City of London pubs, as they’re going to do a roaring trade this week at this rate!!!

LOOK AHEAD – Trump’s ‘reciprocal’ tariffs have gone effect today, and developments on the trade front are surely set to remain the market’s main focus.

Nevertheless, we do also today get minutes from the March FOMC meeting tonight, which though stale will shed some light on the Committee’s thinking around the potential risks of stagflation facing the US economy. Today’s 10-year auction will also be closely watched, especially after yesterday’s 3-year sale resulted in an ugly 2.4bp tail.