Investors were already counting the days until President Trump announced’reciprocal duties’. Investors were already showing signs of concern in global stock indexes led by US majors.
Both the Dow and Russell 2000, a lesser-known stock index that is an indicator of sentiment towards US midcap companies with a domestic focus, had peaked at the end of November.
In mid-February, the S&P 500, and NASDAQ, both of which have a large weighting in favor of tech giants reached their highest levels ever.
All the US majors have sold since then and are now back to levels seen shortly after Trump won his election on November 5th. In the second half of March, they had a slight recovery.
Investors were clearly becoming more cautious. Tariffs were viewed as a potentially positive or negative factor. The President could impose a small tariff as a baseline on countries that he felt were acting unfairly.
He could also do worse. He did much worse in the end.
The majority of tariffs were ‘altered’, retargeted and postponed in a relatively rapid process. It appears that the baseline 10% tariff on all exports of the US trading partners was more than what markets wanted.
In the absence of several successful negotiations country by country, the rates could return to their original levels in just three months.
One thing is certain: the Trump administration is really targeting China in this whole mess.
The tariff dispute has now become a full-blown trade war, thanks to bellicose language and thin skin on both sides. Investors now try to determine if the dispute can be settled and, if it is, for how long.
Analysts all have opposing opinions about which party will be most affected and if they are likely to blink the first. Some analysts argue that the willingness of President Trump to reduce tariffs in general is an indication of his weakness. Maybe.
The fact that his levies on China were increased to 145% does not suggest otherwise. There’s also the claim that China’s autocratic regime can accept more hardships for its citizens than Trump.
China is still in a bad state of affairs, despite what data may show, and the property collapse means it cannot rely solely on its own domestic market as a replacement for its export markets.
It appears that the Trump Administration panicked as US Treasuries began to meltdown. The Trump administration could tolerate a drop in the stock market, but would not accept any threat to America’s safest asset.
Even as the US Dollar was falling, the yield of the 30-year bond had the biggest jump in a single week since the 1980s. The US dollar was in freefall and it looked like something burst.
Is China responsible? The bond market’s sell-off was unlikely to be solely their fault. Given how much US Government debt they hold, it would be a self-defeating move.
A similar move could also increase the value of yuan and make exporters’ lives more difficult.
The dislocation in the US dollar-US Treasury bond market was likely due to the massive deleveraging of hedge funds and shadow banks.
The markets were calmer during the Easter week. It doesn’t seem like the crisis is over yet.
It’s just that the stakes are too high and so is everyone else’s ego. This will all be sorted out at some point. The risk market is likely to experience a great deal more pain until things return to normal.
David Morrison, Senior Market Analyst for Trade Nation. His views are his. )
The post “Dangerous times” may change as new information becomes available.
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