Whiplash

Liberation from tariffs

President Trump announced on Wednesday a three-month pause on tariffs for dozens of countries (capped at 10%) just a week after his announcement sent markets into free-fall. China, which retaliated with proportionate measures, was the only country not offered a reprieve.

Equity markets devoured the news, with the S&P 500 rising 9.5%, its best day since 2008. European and UK equity markets also surged higher. However, there are important differences between now and 2008. The latest rally was driven by the reversal of a specific government policy rather than central banks riding to the rescue by lowering interest rates.

Right now, this rebound looks more like relief than euphoria, given how much pessimism had been priced into the stock market. And looking ahead, the still high levels of tariffs, inflationary implications and ongoing business uncertainty raise the bar for emergency rate cuts, although signs of stress in the labour market may force their hand.

Making sense of bond yields

Let’s rewind the clocks. After the US imposed a 104% tariff on China at midnight on Tuesday, the 10-year yield increased 0.6% over the subsequent three days – its biggest three-day jump since 2001. This was unusual to see alongside falling stock prices, given how the typical relationship in these risk-off episodes is for bond prices to rise.

This likely reflected a mix of factors. Alongside an unwinding of positioning, a shift in the perceived supply/demand balance appears to have also been a driver, given how China is a big exporter to the US and has historically recycled its dollars into US bonds. What’s more, the intersection of growth fears and inflation risks likely reduced the appeal of owning any US-dollar denominated assets, as evidenced by dollar weakness against the Euro and Japanese Yen.

Nevertheless, the speed of the adjustment raised eyebrows at the White House and may have played some role in swaying Trump to take a step back. This is significant, because on the one hand, it may reduce the probability that an extreme policy mix returns given the pressure from markets. On the other hand, US businesses will probably find it difficult to invest for the future given lingering policy uncertainty.

Cooler inflation

US inflation cooled broadly in March, indicating some relief for consumers. The inflation slowdown reflected a decline in energy costs as well as hotel stays and airfares. This came as a surprise given it implied limited to no pass-through so far from the 20% increase in tariffs on Chinese goods in February and March. What it does suggest, however, is that consumers may be pulling back on discretionary spending.

Spread your bets

In choppy policy environments like these, where market wobbles are likely, staying diversified isn’t just smart – it’s essential. With policy curveballs, a well-diversified portfolio can act like a shock absorber, spreading risk across asset classes and cushioning the impact when one area takes a hit. More importantly, it helps investors stay the course over the long term – navigating short-term storms without losing sight of long-term goals.