Trump’s tariffs went live yesterday, sending global markets—including the US indices—tumbling, until rumours of a potential rollback started circulating. High volatility is driving investors toward safe havens like bonds and gold, while the Trump-fueled rally in the US dollar index has already reversed.
Up and down
The DAX got hit by a hefty 3.50% selloff, the CAC 40 fell 1.85% while the Stoxx 600 tumbled more than 2%, the Japanese Nikkei eased to the lowest levels since September and the major US indices – from big cap, tech-heavy to medium and small cap benchmarks – fell below the levels they were trading at when Donald Trump was elected president last November.
The aggressive reaction was curious, though, as investors knew that the tariffs would go live yesterday, suggesting that a clear majority was expecting Trump to make a last-minute U-turn – a thing that he did! There are now rumours circulating that he may roll back some of the tariffs. The DAX futures are up by almost 2% at the time of writing.
The news flow becomes annoying, of course, as crucial decisions change in a matter of minutes. The market reaction is often aggressive, the volatility is rising, and investors are naturally moving toward the safer pockets of the market. As such, bond are performing better than equities since Trump is elected President and portfolio allocations to gold are lifted.
Deteriorating earnings outlook
US earnings season was pretty strong. With almost all companies having reported earnings, 75% of the companies managed to beat earnings expectations. The S&P500 earnings grew by around 18% – the highest earnings growth rate since Q4, 2021. Alas, companies issued more negative guidance than positive guidance. Target and Best Buy joined in yesterday warnings that the US consumers will have to face higher prices because of Trump’s tariffs. But since we’re emerging from a period of relatively high inflation, companies have less room to pass price increases on to customers and the latter is weighing on earnings outlook. In summary, tariffs are just as toxic for American companies as they are for others. America won’t be great by destroying value globally.
USD’s Trump rally reverses
The greenback couldn’t come out of the latest tariff quake victorious. The dollar index slumped nearly 1% yesterday and slipped below the major 38.2% Fibonacci retracement on Trump rally: the post-election Trump bump in the US dollar is now reversed. The EURUSD rocketed past the 1.06 mark and stepped into the medium-term bullish consolidation zone after clearing the major 38.2% Fibonacci resistance on Trump selloff. Cable – which had stepped into the medium-term bullish consolidation zone a few weeks ago – is now testing the 200-DMA resistance to the upside. The rebound in the Loonie and Aussie remain more contained however as the global trade tensions weigh on growth expectations and the demand outlook for commodities. The fact that Saudi’s Aramco has cut dividend, combined to OPEC’s decision to restore output, means that Saudis have interest to maximize oil sales to replenish their coffers. As such, crude outlook remains comfortably negative in the short run.
Today, investors will watch the US ADP report, and PMI, ISM numbers from both sides of the Atlantic Ocean. While the European investors could brush off bad news on expectation that the US tensions will boost activity sooner rater than later, weakness in the US data will probably be perceived as bad news and should further weaken appetite.
