Off We Go Again On The Trade War Merry-Go-Round

WHERE WE STAND – So, we flip-flop again. Twice, in fact!

First, Trump on Powell. Having spent the majority of last week complaining about the Fed Chair, and harping on about how his ‘termination’ can’t come quick enough, the President now appears to have changed his mind. Apparently, he neither has, nor had, any intention of firing Powell, even if he still believes that now would be a “perfect time” for the Fed to cut rates. Give it until after the May FOMC, though, when rates will be kept on hold, and I wonder if Powell’s head will be on the chopping block once more.

Second, Trump on China. Again, the stance here has softened, with the President remarking that tariffs on China will drop “substantially” in the event of a deal being struck between the two nations, albeit not being eliminated entirely. Add to this comments from Treasury Sec Bessent noting his expectation that tensions between the two will de-escalate, and WSJ reports that the US is apparently mulling cutting its tariffs on China in order to ratchet down tensions, and murmurings that agreements with Japan and India are inching closer, and the ‘mood music’ suddenly seems a lot more positive. Even if Bessent did pour a bit of cold water on the tariff line later on.

Isn’t it remarkable how the ‘Art of the Deal’ appears to simply be for Trump to negotiate with himself (aka fold like a cheap suit), then to end up jumping around claiming a ‘win’ anyway.

Before getting to yesterday’s trade, there’s a broader point that I’d like to make.

Namely, as we all continue to digest yet more erratic Trump Admin policymaking, while these latest developments obviously have bullish near-term implications, it all again speaks to the incoherent and volatile nature by which policy continues to be made. The point here is that, it’s not necessarily what Trump – or his acolytes – say that is eroding the US’s credibility, and haven value of its assets, but the nature by which all of this is being delivered. Frankly, the ever-changing stances on display are likely to do nothing to stem the tide of the ‘sell America’ trade, especially considering that such paradigm shifts take months, not days, to fully pan out.

Anyway, all of this positive rhetoric was enough to spark a risk rally yesterday, with stocks charging higher on both sides of the Atlantic. That said, the benchmark S&P 500, while ending the day in the green, did cut intraday gains in half by the close, pulling back significantly from the top of the recent range at 5,500.

As such, I view this as a bounce that is ripe to be sold into, especially given the degree of straw clutching that appears to be going on right now, and with the degree of prevailing uncertainty having hardly lifted at all. Actions, in this case deals being made, speak louder than words, and mere positive rhetoric.

Besides equities, long-end Treasuries also gained ground on the day, as the curve flattened significantly, though benchmarks ended the day off yield tights. While it might feel counter-intuitive for Treasuries to rally in line with equities, the move likely owes to the aforementioned Trump comments regarding Chair Powell, which restored – for now at least – a degree of credibility, and lessened some degree of tail risk around policy independence being under threat.

That would also help to explain the USD upside seen throughout the session, with the greenback gaining ground against pretty much all peers, as the DXY rose back above the 99.50 mark. Akin to the gains in equities, this is a move that I’d be content in fading, with the idea of US exceptionalism dead, and the buck remaining the single most exposed asset to the whims of Trump’s policies.

Finally, gold unwound even more of its recent gains, having lost about 3% on the day, with $3,500/oz looking like a near-term top for the time being. Still, with the yellow metal now over $200 off those highs, this represents a solid dip buying opportunity, with bullion still representing an attractive haven, given its somewhat insulated nature from the political to-and-fro seen elsewhere.

LOOK AHEAD – A few interesting items on today’s calendar, though focus will naturally remain on the latest trade developments, and other political news flow.

Anyway, on the data front, Germany delivers the latest IFO sentiment surveys this morning, with all three metrics likely to have slumped MoM as a result of the tariff uncertainty with which we are now all far too familiar. Across the pond, the latest US durable goods orders and existing home sales prints are due, as is the weekly jobless claims report, where the continuing claims print coincides with the survey week for the April NFP print, due next Fri.

Besides that, another busy slate of central bank speakers is due, including four from the ECB, while this week’s US supply wraps up with a $44bln 7-year auction, which should proceed smoothly, after yesterday’s solid 5-year sale.

Finally, another busy day of corporate earnings awaits, with Alphabet the most notable release. GOOG options imply a move of +/-5.8% in the stock after the report, with consensus expecting EPS at $2.01, on revenues of $89.1bln. Other notable reports today include Intel, American Airlines, and PepsiCo.