By Mike Dolan
LONDON (Reuters) – Morning Bid U.S.
What matters in U.S. and global markets today
By Mike Dolan, Editor-At-Large, Financial Industry and Financial Markets
The mere threat of a trade war unnerved markets, but they now have to cope with the real thing, as U.S. tariff hikes on metals imports kick in today and retaliation comes swiftly. I’ll discuss the ongoing market gyrations below.
Today, I’ll also take a closer look at U.S. President Donald Trump’s ‘reaction function’ toward financial market volatility and consider if it may affect policy decisions going forward.
Today’s Market Minute
Tariff tremors
Tuesday was yet another down day for the S&P500 after a volatile session on Wall Street, though Trump’s pullback from a late 50% tariff sideswipe against Canada calmed the horses somewhat.
The prospect of a temporary ceasefire in the Russia-Ukraine war also elicited some relief, even if Ukraine is the only side on board with the U.S.-brokered deal so far.
And now slightly punch drunk markets are waiting to see the latest U.S. consumer price report, though last month’s inflation is slightly beside the point for the markets and the Federal Reserve – as both are more wary of what’s coming down the pike.
Headline and core inflation are expected to have ticked down a notch in February, with the latter falling back below 3%.
Fed officials are in their traditional public blackout period ahead of next week’s meeting. Markets expect no further easing until June, as the central bank will need to parse the tariff impact and economic downturn signals.
With a 10-year note auction today, U.S. Treasuries were steady first thing this morning, while the dollar held precariously above Tuesday’s new low for the year. High-yield corporate credit spreads hit another 6-month high at 322 basis points yesterday, however.
The Vix ‘fear index’ has also pulled back slightly from recent highs, while stocks in Europe and Asia were generally firmer going into the U.S. trading day.
Meanwhile, the Canadian dollar has remained remarkably calm, despite tariffs kicking in, a new Prime Minister in office and a Bank of Canada interest rate cut expected later today.
Investors see an 87% chance the BoC will cut its main policy rate by 25 bps from 3%, the latest after two percentage points of easing since June.
Given all the market volatility in recent weeks, let’s now consider whether any financial market is still capable of pushing back on the U.S. president’s agenda.
‘Stock Troopers’ prove Trump’s biggest market foes
The fabled “bond vigilantes” and “currency cops” have yet to really push back on Trump’s agenda, leaving anxious equities as the only financial market countering the U.S. president’s new economics.
Enter the “stock troopers”.
The Trump team has progressed to economic trench warfare this week, with the president doubling down on Canadian tariffs just the biggest stock meltdown since his inauguration. But plunging equities could yet shift his policy calculus.
Not only has Trump routinely identified the stock market as a critical measure of his success in the past, but the precipitous loss of market value this month could undermine the confidence of rich American families sensitive to the “wealth effect” and critical to aggregate consumption and growth.
Trump and his deputies attempted to face down the skirmish and economic risks last weekend, passing off the turbulence as a temporary, inevitable hiccup given the scope of their radical policy change.
Perhaps the most telling Trump comment in the unfolding battle was: “I’m not even looking at the stock market.”
This nonchalant view – coming from a president who previously used U.S. equities as a policy weather vane – unsurprisingly spooked investors.
Many had assumed they had a “Trump put”, essentially the willingness of the new administration to slow down or pull back on its disruptive tariff and spending agenda if stock markets balked.
Back in his State of the Union address to Congress in February 2020, Trump said of the stock market: “All of those millions of people with 401(k)s and pensions are doing far better than they have ever done before with increases of 60, 70, 80, 90 and 100% and even more.”
So far, the president has yet to acknowledge the reversal of some of that paper wealth, despite the 8-12% losses posted by three key Wall Street indexes since he was sworn back into office in January – with a loss of some $5 trillion in total market value.
HIGH AND RISING
But with business confidence draining amid tariff and jobs uncertainty, including among traditionally pro-Trump small business, investors at home and abroad smell big trouble. Wall Street and global investment houses are rushing to downgrade recommended weightings in U.S. equity and cutting U.S. growth forecasts to boot.
“Uncertainty is high and rising on Main Street, and for many reasons,” said Bill Dunkelberg, Chief Economist at the National Federation of Independent Business (NFIB), whose February sentiment survey posted its third straight decline last month.
Big global investors fear the potential inflationary effects of Trump’s trade, business and diplomatic upheavals. This should be alarming for the president, given the politically toxic impact of high inflation on the previous administration of Joe Biden.
“I think if we all are becoming a little more nationalistic and – I’m not saying that’s a bad thing, you know, it does resonate with me … (but) it’s going to have elevated inflation,” BlackRock CEO Larry Fink said on Monday.
And it’s not only domestic investor confidence that’s wavering, which should be unnerving considering how much foreign investment has pumped up Wall Street in recent years. That’s especially true of European funds, many of whom can now find emerging opportunities back home in their cheaper equity markets.
A standoff with the stock market is certainly not what most people had predicted after the election.
Many bet that so-called bond vigilantes – faced with a wobbling Treasury market and rising government borrowing costs – would push back against unfunded tax cut plans, rising deficits and inflationary tariffs.
Then, as tariff hike threats mounted, the dollar initially rose sharply, and some felt this currency move would neutralise the impact of the import taxes on foreign businesses selling into America.
But business and household jitters coupled with the prospect of an economic downturn have seen stocks cry foul instead, even as Treasury yields and the dollar turn tail.
Some speculate that market-savvy Treasury Secretary Scott Bessent has convinced Trump that getting Treasury yields down – and the dollar with them – is a bigger win given what the administration wants to do. If true, you could argue that the administration has posted two successes from the three main macro markets – which may satisfy them for now.
But a snowballing stock market slump will surely resonate more roundly with Trump’s base. And if it catalyzes a wider recession, it may pack a far bigger punch than bonds or currencies.
Chart of the day
Trade wars are not one-way affairs, and retaliation to Trump’s tariff moves is drawing swift responses that will amplify the economic impact of the president’s actions. Increased tariffs on all U.S. steel and aluminum imports took effect on Wednesday, drawing counter tariffs from the European Union on 26 billion euros ($28 billion) worth of U.S. goods from next month. Trump initially threatened Canada with doubling the duties to 50% but then backed off after Ontario suspended moves to impose a 25% surcharge on electricity exports to the states of Minnesota, Michigan and New York.
Today’s events to watch
* US February consumer price report, February Federal budget
* Bank of Canada policy decision
* European Central Bank President Christine Lagarde, ECB chief economist Philip Lane and Bank of France Governor François Villeroy de Galhau speak in Frankfurt
* US Treasury sells $39 billion of 10-year notes
* US corporate earnings: Adobe, Crown Castle
* Chancellor of Germany Olaf Scholz and EU council president Antonio Costa hold news conference in Berlin
* G7 foreign ministers gather in Quebec
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.
(By Mike Dolan; Editing by Anna Szymanski)
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