Tariff reprieve lifts markets as sentiment turns cautiously upbeat

WHERE WE STAND – All is right with the world once more, as the S&P 500 future reclaims its 200-day moving average!

I jest, of course, and as a tactical bear I wouldn’t exactly say I’m pleased to see that milestone having been chalked up, but ‘Mr Market’ clearly started the week in a more optimistic mood yesterday.

The catalyst for this optimism came after weekend reporting, via the WSJ, that President Trump’s proposed reciprocal tariffs may prove “more targeted” than the blanket barrage of levies that has previously been threatened. The reporting also touted the possibility of some nations being exempt from the measures, while also casting doubt on whether other sector-specific tariffs (such as those on autos, chips, etc.) will be delivered on the same date. Importantly, these ‘sources’ stories did not seem to be met with any denial from the Trump Administration, perhaps adding to their credibility.

Of course, this is just the latest to-and-fro in the seemingly never-ending tariff saga, with the reporting likely having fired the starting gun on what will now be a week or so containing plenty of ‘noise’ and precious little ‘signal’ on the trade front, as we move closer to ‘Liberation Day’ on 2^nd April.

In any case, despite the caveats, those headlines dropped into a market where the bears had probably grown a little exhausted, especially with the S&P having last week snapped a 4-week losing run. Couple that with supportive end-of-month/quarter flows, a spot of short covering, as well as some solid-ish ‘flash’ US PMI figures, and you have a decent mix for a short-term bounce in sentiment, and in riskier assets.

That said, I’m not going to get too excited about this move just yet, and still favour fading equity rallies in the short-term. Uncertainty on the trade front is set to remain elevated for some time to come, with 2^nd April more likely to mark the start, than the end, of this long-running tariff saga. Earnings and economic growth expectations, hence, remain rather too lofty in my view, while the absence of a ‘Fed put’ continues to leave the market more vulnerable to external shocks than in recent years.

Again, though, I stress that IF the Trump Admin. are able to effectively reallocate resources from the public to the private sector, then the long-run bull case for the US economy, and Wall Street, is an incredibly solid one. I just don’t think we’re at the stage, yet, for dip buyers to be stepping in en masse, even if the earlier-mentioned tailwinds could give this relief rally some legs as the week progresses.

Anyway, back in the here and now, Treasuries sold-off across the curve yesterday, as sentiment improved, and as participants braced for a significant week of supply at the front-end and in the belly. Benchmark 2- and 10-year yields rose as much as 7bp apiece, climbing north of 4.00% and 4.30% respectively.

Zooming out, though, 10s remain stuck in a 4.15% - 4.35% range, despite what’s been incredibly choppy trade over the last three weeks or so. We need a break either way here for folk to become more excited, and for momentum behind a move to build, though I remain a fan of the risk/reward on offer for longs.

That cheapening in the Treasury complex also helped to put a bid into the greenback, though in truth conditions in the FX space were considerably quieter than elsewhere. The JPY stood as the worst performer on the day, as USD/JPY climbed back above the 150 handle to print 3-week highs, once again demonstrating its susceptibility to shifts in the FI arena.

Elsewhere, the common currency softened, trading below the 1.08 figure intraday, with the euro failing to find much by way of demand despite the ‘flash’ composite PMI rising to a 7-month high. The quid also failed to find much demand on the back of solid PMI figures, with cable languishing in the low-1.29s, likely as a 6-month high composite metric does little-to-nothing to mask the grim, stagflationary UK economic outlook, and sizeable fiscal tightening that Chancellor Reeves will deliver tomorrow.

On the whole, I still see little to like about the buck right now, and would be tempted to fade some of these moves, still expecting the EUR at 1.10, and cable back above 1.30, in short-ish order.

The FX market, though, and frankly all asset classes, do seem to be in a state of flux right now, and will probably remain so until clarity on the 2^nd April tariffs has been obtained.

Lastly, yesterday wasn’t a day entirely without tariffs being thrown around, with President Trump announcing an additional 25% levy on imports to the US from countries buying oil from Venezuela. This bunch includes the likes of China, Spain, Turkey…and, per last month’s data, the United States of America.

Presumably Trump won’t slap a tariff on himself, but at this point I probably wouldn’t bet against it.

LOOK AHEAD – A busy-looking calendar ahead, today, though it’s tough to argue that any of it will be particularly market-moving.

This morning brings another read on German economic sentiment, this time from the IFO institute. Business climate is expected to tick higher to 86.7 in March, which would be the highest level since mid-2024, though perhaps not as big a boost as you might imagine 500bln of fiscal stimulus should provide.

Across the pond, a handful of second-tier prints are due, including last month’s new home sales report, as well as this month’s Richmond Fed manufacturing data, and consumer confidence figures from the Conference Board. This latter print, seen at 93.6 from a prior 98.3, is likely of most interest, particularly after the UMich sentiment metric fell to more than 2-year lows earlier in the month.

Elsewhere, the central bank speaking slate is busy from both the ECB and the FOMC, while a 2-year Treasury auction kicks off a busy week of US supply. Finally, notable earnings today come from the original ‘meme stock’ Gamestop (GME).