ORLANDO, Florida (Reuters) – TRADING DAY
Making sense of the forces driving global markets
By Jamie McGeever, Markets Columnist
The 100-day (trade) war
Unlike the day before, Wall Street extended the broad-based upswing across Europe and Asia on Tuesday as investors shrugged off a record high U.S. trade deficit in March, and took heart from signs that global trade tensions continue to ease.
Washington says it is making progress in trade talks with several countries, although a direct line to China has yet to be established. Could Beijing ‘weaponize’ its stash of Treasuries as part of the trade war with America? Unlikely, and below I explain why, but first, a roundup of today’s market moves.
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.
If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today.
1. UPS cuts 20,000 jobs, GM delays investor call as Trump’stariffs create corporate chaos 2. US exit from IMF would be true dollar shock: Mike Dolan 3. China ramps up global yuan push, seizing on retreatingdollar 4. In a vise of slowing demand and rising costs, smallbusinesses are signaling trouble ahead 5. US Supreme Court fight may shape Trump’s ability to fireFed chair
Today’s Key Market Moves
* Wall Street rises across the board – the Dow gains 0.8%,the S&P 500 and the Nasdaq both rise 0.6%. * The S&P 500 posts its highest close since Trump’s April 2’Liberation Day’ and rises for a sixth day – its best run thisyear. * The VIX volatility index falls below 24.0 for the firsttime since Trump’s ‘Liberation Day’ tariffs. * Britain’s FTSE 100 rises for a 12th consecutive day, itslongest winning streak in more than eight years. * U.S. Treasury yields fall to a three-week low, by as muchas 5 basis points at the long end. The curve bull flattens. * A day of reversal across G10 FX – the U.S. dollar indexrises 0.3%, while the euro, sterling, yen and Swiss franc allfall a similar amount. * Oil falls to a two-week low, with Brent crude futuresdown 2.4%. That brings the decline so far this week to 4%. * Bitcoin up 1%, close to making multi-month highs above$95,857. Britain sets out new rules to boost confidence incrypto.
Do you want to make a deal?
If it was a calm day in terms of headline stock, bond and currency moves on Tuesday, there was huge churn under the surface, particularly in the shares of firms reporting first-quarter results and attempting to give guidance for the quarters ahead.
The overall picture on Tuesday was reasonably upbeat. European shares rose for a sixth day, lifted by banks like HSBC and Deutsche Bank, while British stocks rose for a 12th day, a record winning streak last seen in December 2016-January 2017.
Wall Street eventually made up its mind late in the day to join the rally. If markets are beholden to the constant twists and turns in the newsflow on tariffs and trade deals, investors definitely latched onto the positive ones on Tuesday.
China has waived the 125% tariff on imports of ethane and some other products from the United States, U.S. trade secretary Howard Lutnick said a deal with an unnamed country has been reached, and President Donald Trump is set to soften auto tariffs.
So even though Trump and China’s President Xi Jinping may not be talking to each other yet, negotiations elsewhere are well underway. But investors’ optimism may be fragile and fleeting – about 40 companies have removed or lowered their forward guidance in the first two weeks of the first-quarter earnings season, a Reuters analysis showed.
Among them are General Motors, Sweden’s Electrolux and Volvo, and Germany’s Adidas and Porsche, who have pulled or slashed their 2025 forecasts because they don’t have the visibility required to invest, spend, or plan ahead.
Meanwhile, oil heavyweight BP reported a near-50% slump in profits and UPS said it would cut 20,000 jobs to lower costs. Cracks are starting to appear in the U.S. economy – data on Tuesday showed that pre-tariff stockpiling pushed the trade deficit to a record high in March, while job openings fell more than expected this month.
Wednesday’s earnings calendar is packed with major Asian, European and U.S. reports. The pick of the bunch will likely be from U.S. ‘Magnificent Seven’ constituents Microsoft and Meta.
Investors are lurching between optimism, caution and pessimism on a daily basis, which explains why markets have largely flatlined for the last couple of weeks.
This is a big week for earnings and economic data, and longer-term policy developments too. The U.S. Treasury on Wednesday announce its debt auction sizes for the coming quarter, and on Thursday the Bank of Japan sets interest rates.
Why China won’t ‘weaponize’ its U.S. Treasuries stash
China’s ‘nuclear’ option in its financial war with the United States has long been assumed to be rapidly liquidating its outsized Treasury bond holdings, as this could crash the dollar, jack up interest rates and disrupt the U.S. economy.
Concerns about this potential threat have returned in recent weeks, as all-out trade war has broken out between the world’s two largest economies. But this fear of ‘mutually assured financial destruction’ is, and has always been, a notion based more in myth than reality.
Dollar-denominated assets made up 55% of China’s official currency reserves at the end of 2019, the last official confirmation of this figure by China’s State Administration of Foreign Exchange (SAFE), down significantly from the peak of 79% in 2005. It was also below the prevailing global average in 2019 of 61%, according to International Monetary Fund data.
Some of this has likely been offset by increased dollar holdings among state commercial banks, whose foreign portfolios are thought to be much more weighted toward dollar assets. But, like other countries, China has been steadily reducing its relative exposure to the greenback over the past 20 years.
This trend is even clearer with regard to China’s official holdings of U.S. Treasuries, which stood at $784 billion in February, according to U.S. Treasury data. That’s down from a peak of $1.32 trillion in 2013 and is less than 3% of the $28 trillion Treasuries market, a far cry from the high of 14% that China commanded in 2011.
China does own Treasuries held in other countries like Belgium, but again, the trend is clearly moving in the direction of less exposure to the U.S.
These figures suggest that China’s power to inflict damage in the U.S. bond market has been diluted considerably over the last decade.
COULD THEY DO IT?
Nevertheless, the outflows it could potentially trigger by selling are still huge in nominal terms.
Could China sell large chunks of its Treasuries stash? Of course, anything is possible, especially now that the established global economic, financial and political norms of the past several decades are being rewritten.
But it certainly wouldn’t be in China’s interest to do so. The obvious reason is the most pertinent: dumping Treasuries would crush the value of its own holdings, landing a risk-averse state with heavy losses. Poking Washington in the eye is one thing, shooting oneself in the foot is another.
From a practical standpoint, it would also be extremely difficult. The market would almost certainly get wind that something was up and sell to get ahead of the game, again leaving Beijing with significant capital losses.
Moreover, any market dysfunction would also quickly be met with large-scale buying from the Federal Reserve to ensure financial stability.
And the last thing China needs in the face of weak growth, deflation and a crippling trade war with the U.S. is a stronger currency. Beijing would not necessarily have to buy yuan with the proceeds from any Treasury sales. But in its current situation, it would be counterproductive for Beijing to try to undermine the U.S. by weakening the dollar, even temporarily.
“100-YEAR HORIZON”
Instead, China could ‘move up the curve’ by allowing the Treasury notes it holds to mature, reinvesting the proceeds in bills or other cash instruments. That’s a dollar-neutral policy, but it could still push long U.S. yields higher.
“We know the U.S. is having some trouble selling notes – China could make that even harder,” says Brad Setser, senior fellow at the Council on Foreign Relations.
Beijing could also make stronger tweaks to its non-U.S. custody holdings of Treasuries, or Chinese state commercial banks could reduce their holdings, as neither would appear in official FX reserves data.
But ultimately, China is probably stuck with the Treasuries it has, and the route to lowering that exposure will be the same as it has been for years: passive and gradual.
At an event hosted by the Institute of International Finance in Washington last week, U.S. Treasury Secretary Scott Bessent said he wants to see quick “results” in fixing global trade, economic and financial imbalances.
“Some countries might have a 100-years perspective. We don’t,” he quipped, clearly nodding to China.
China’s economic horizon may not be quite that long, but it is longer than Washington’s. And as China considers what to do with its U.S. debt or dollar holdings, it will likely leave the rash policymaking to Washington and continue to play the long game.
What could move markets tomorrow?
* Huge day for Q1 earnings reports, including: Samsung,Glencore, UBS, Barclays, Microsoft and Meta. * China PMIs (April) * Japan retail sales, industrial production (March) * Germany inflation (April, preliminary) * Germany GDP (Q1, flash) * Euro zone GDP (Q1, flash) * U.S. GDP (Q1, advance) * U.S. PCE inflation (March) * U.S. Chicago PMI (April)
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 Bill Berkrot and Nia Williams)
