By Jamie McGeever
ORLANDO, Florida (Reuters) – TRADING DAY
Making sense of the forces driving global markets
By Jamie McGeever, Markets Columnist
Highest U.S. tariffs in over 100 years slam markets
On March 7, U.S. Treasury Scott Bessent said the U.S. economy could be in for a “detox period” as it adjusted to President Donald Trump’s transformative policy agenda. The gyrations on Wall Street and beyond on April 3 following Trump’s sweeping global tariffs the day before suggest that may be a huge understatement.
U.S. stocks, the dollar and oil cratered on Thursday, bond yields plunged and volatility soared, as Trump’s tariffs at a stroke darkened the near-term outlook for spending, investment, corporate earnings, economic activity and growth.
Trump’s tariffs on China are among the highest. Will Beijing risk devaluing the yuan? See below for more, but first, a round up of today’s remarkable moves on world markets.
I’d love to hear from you, so please reach out to me with comments at jamie.mcgeever@thomsonreuters.com. You can also follow me at @ReutersJamie and @reutersjamie.bsky.social.
Today’s Key Market Moves
* The S&P 500 tumbles 4.8%, the Dow 4%, the Nasdaq 6% andthe Russell 2000 small cap index 6.6%. * That’s the worst day for the S&P 500, Dow and Russell 2000since June 2020, and the Nasdaq’s steepest fall since March2020. * The “Magnificent Seven” group of Big Tech shares is backin a bear market. The Roundhill “Mag 7” ETF falls a record 6.9%,taking its decline since December’s peak to 25%. * All 10 sectors in the S&P 500 close in the red, theworst-performing sector being energy, down 7.5%. OPEC’s outputboost adds to tariff fears, oil tumbles 7%. * Apple shares slump 9.1%, the biggest fall since thepandemic, while Dell tumbles 19% and Nike shares fall 14.4%. * The MSCI World index falls 3.4% for its biggest loss innearly three years. * The dollar index posts its biggest fall in over two years,sliding 1.6%. * U.S. Treasury yields fall across the board, led by a hugedecline of more than 20 bps at the short end, bull-steepeningthe curve.
Trump is on fire, global markets tariffied
One should never read too much into a single day’s trading in financial markets, but some days are so dramatic it’s difficult not to. Thursday is one of them.
Declines of more than 4% on Wall Street and near-2% swings in the dollar don’t come around too often, and outside of major crises like the Global Financial Crisis or the pandemic, they are even rarer.
So it is a measure of investors’ shock at the severity of Trump’s tariffs, trepidation over the damage they’ll inflict – and, no little disbelief at how they were calculated – that markets gyrated as much as they did on Thursday.
Economist David Beckworth posted on social media platform X that Trump’s latest salvo in his global trade war may be “one of the biggest unforced economic policy errors in US history” – a bold claim, perhaps, but one which seems to be resonating.
Analysts are ratcheting down their U.S. growth forecasts, and sub-1% expansion this year is now in view, while recession risks have risen sharply. Rates traders are now pricing in almost 100 basis points of Fed cuts this year and 150 bps by the middle of next year.
As economist Rebecca Harding states, “nobody wins from the trade war.” It’s a simple but important point – the economic and market outlook everywhere is suddenly bleaker, especially in some of the Asian countries that have been hit with the heaviest duties.
What’s more, policymakers find themselves in an even tighter spot. Will the Bank of Japan be so keen to continue with its rate-hiking campaign? Will the European Central Bank or Bank of England be forced to cut rates more than planned if the euro and sterling continue rising? And how does powerhouse China respond?
Part of the problem for everyone – investors, households, businesses and policymakers – is Trump’s propensity to change course in the blink of an eye. Some tariffs may be lowered, exempted, or postponed within days, should countries come to the negotiating table and strike a deal with “Tariff Man”.
Of course if they are maintained, or countries retaliate, the economic and market outlook could darken even more, stoking volatility and uncertainty – good for gold, bonds and short sellers; not so good for stocks, credit and other risky assets.
If investors are hoping a sense of calm might descend on markets on Friday, think again – the latest U.S. payrolls will be released at 8:30 ET, and a few hours later Fed Chair Jerome Powell delivers a speech on the economic outlook.
Stock futures around the world are pointing to heavy losses at the open. Buckle up.
What next in world trade war? Watch the yuan
What’s the most important exchange rate in the world right now? Probably dollar/yuan.
How Beijing responds to the eye-popping tariffs the Trump administration slapped on Chinese exports to the U.S. will be critical not only for China, but also for its ‘plus one’ trading partners in Asia, and world markets more broadly.
The total tariff rate on U.S. imported goods from China is now a whopping 54%. If maintained for a reasonable length of time, this will be a financial hit to Beijing that will likely hinder its efforts to address its lingering real estate crisis, boost consumption, build its military might, and fund its myriad investments.
And, unlike in the first Trump trade war, China can’t rely on funneling exports and investment through ‘plus one’ countries in Asia to mitigate the tariff shock because those nations have also been hit with punitive levies. In some cases, like Vietnam, the tariffs are even higher than China’s.
That leaves currency devaluation as perhaps the most powerful weapon China can wield as it looks to respond to Washington’s latest salvo. But unfortunately for Beijing, that strategy is fraught with risk.
LIMITED ROOM TO MANEUVER
A rapid fall in the yuan’s value could trigger huge capital flight as international and domestic investors pull money out of the country, slamming domestic asset prices and stoking financial market volatility.
And beyond China’s borders, a tumbling yuan could force other Asian countries to let their currencies fall in order to maintain competitiveness, potentially sparking a ‘beggar-thy-neighbor’ FX devaluation war, the last thing any of them need.
Moreover, currency devaluation runs counter to the sweep of reforms and stimulus measures Beijing has announced since September, as it seeks to reflate the economy via domestic consumption rather than exports.
And China’s room for further policy stimulus is already fading. Further interest rate cuts and liquidity provisions will probably come, but a major fiscal boost will involve issuing more bonds, which will strain an already widening budget deficit.
Indeed, Fitch downgraded China’s credit rating on Thursday by one notch to ‘A’, citing a deterioration in the public finances as Beijing scrambles to shore up tariff-hit growth.
“Everything now depends on China,” says Robin Brooks, senior fellow at the Brookings Institution, warning that a meaningful devaluation of the yuan could begin a global ‘risk-off’ downward spiral that could slam emerging markets and, if it persists, tank the U.S. economy as well.
ALL EYES ON CHINA
Beijing has previously said it won’t go down the FX depreciation road, preferring to keep the yuan relatively “stable”. But that was before Trump’s self-styled “Liberation Day”.
Beijing’s first response might be to try and negotiate with Washington to get the tariffs lowered. But if that fails, FX devaluation becomes a real option to offset the shock.
Analysts at Goldman Sachs are among those who believe China will continue to resist “significant” FX depreciation, but they note that the combined impact of all the U.S. tariffs on China announced since Trump’s inauguration in January could take a 1.7 percentage point bite out of China’s annual growth rate. That’s huge.
What do the FX markets think? You should never read too much into one day’s moves. But it’s worth noting that dollar/yuan on Thursday clocked its biggest spot market rise in five months, and the People’s Bank of China allowed the yuan to depreciate the most in four months at the daily fixing.
Moving forward, the big level to watch for spot dollar/yuan is 7.35, and 7.25 for the central bank’s daily fixing. Breaking through those would leave the yuan at its weakest point against the U.S. dollar since the depths of the Global Financial Crisis in late 2008.
The yuan isn’t too far away from these levels right now. The world is watching.
What could move markets tomorrow?
* U.S. non-farm payrolls (March) * Federal Reserve Chair Jerome Powell speaks on the economicoutlook * Canada unemployment report (March)
If you have more time to read today, here are a few articles I recommend to help you make sense of what happened in markets today.
1. Trump’s tariff formula confounds the world, punishes thepoor 2. The real tariff uncertainty starts now: Mike Dolan 3. Trump’s global trade war may defeat US strategic goalson China 4. Trump’s tariffs roil company plans, threatening exportsand investment 5. US investors caught off-guard by depth of tariffs arebraced for more pain
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
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(By Jamie McGeever, editing by Nia Williams)
