All pain, no gain on Wall Street

By Jamie McGeever

ORLANDO, Florida (Reuters) - TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist 

U.S. stocks slide, yields spike as Trump holds China tariff line

A strong relief rally across Asian and European stocks on Tuesday fizzled out in U.S. trading, and Wall Street closed sharply lower after President Donald Trump doubled down on his pledge to slap eye-watering tariffs on imports from China.

It was a remarkable flip, as U.S. stocks had earlier been up nearly 5%. Just as remarkable was the second surge in long-dated U.S. bond yields, a move that is frustrating Trump and Treasury Secretary Scott Bessent's hopes for a lower 10-year yield.

More on that below, but first here are the main market moves on yet another extraordinary day in global markets. I'd love to hear from you, so please reach out to me with comments at . You can also follow me at @ReutersJamie and @reutersjamie.bsky.social. 

Today's Key Market Moves

* After being on track for its biggest gains since November2022, Wall Street plunges back into the red. The S&P 500 loses1.6% and closes below 5000 points for the first time in a year. * The Nasdaq falls more than 2%, and has lost a quarter ofits value since peaking in December. * U.S. Treasury yields rise as much as 17 basis pointsacross the curve, led by the long end. The 30-year yield is up36 bps in two days, one of its biggest two-day moves on record. * Japan's Nikkei soars 6%, its best day since August 6 lastyear. The index now a couple of percentage points away fromexiting a bear market. * European stocks jump 3.5%, their biggest rise in more thanthree years. * China's offshore yuan tumbles to an all-time low through7.40 per dollar. With the spot market yuan and PBOC fixing ratealso showing accelerating yuan weakness, speculation is risingthat China will use FX as a key tool in the global trade war. * The Japanese yen and Swiss franc are the biggest winnersin G10 FX, the traditional 'safe haven' currencies both rallyingmore than 1% against the greenback. * The U.S. dollar flexes its 'safe haven' muscles against EMcurrencies though. It's now up on the year versus several,including a two-year peak against the South African rand. * Oil falls 2%, clocking up a four-day losing streak inwhich it has fallen almost 20%. Brent crude now down 30% from ayear ago.

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. 'It's like throwing darts blindfolded'; tariffs taketoll on Chinese exporters 2. Limited options push China into trade 'war of attrition'with Trump 3. Tariff-driven Wall Street pain sparks investors to weighmore gloomy scenarios 4. Trump and Powell spar anew in major Fed test: Mike Dolan 5. Brazil, Egypt and Singapore among potential winners fromtariff onslaught

All pain, no gain on Wall Street

It started out so brightly. With the Trump administration lining up talks with South Korea and Japan, and dozens more countries reaching out for "tailor-made" tariff-reducing deals with Washington, investor sentiment on Tuesday was much more positive and a relief rally swept across Asia and Europe.

But that optimism was quickly snuffed out when Washington repeated that 104% duties on imports from China, America's main economic and geopolitical rival, will take effect shortly after midnight.

Other country-specific tariffs of up to 50% will also take effect as planned, but the duties on China are the ones that investors fear the most, as they are the ones that will escalate the global trade war most.

China has refused to bow to what it called "blackmail" and has vowed to "fight to the end." While Trump insists he is open to dialogue, markets are extremely skittish and any green shoots of optimism that appeared over the last 24 hours have been trampled back into the dirt.

Japanese and U.S. stock futures are pointing to fall of around 2% at the open on Wednesday. The Nasdaq remains mired in a bear market, and the S&P 500 is once again on the brink - not the calmest backdrop for the central banks of New Zealand and India to be announcing their latest policy decisions.

The picture is muddied even further by the eye-popping rise in long-dated U.S. bond yields. The 20-year yield leaped 17 basis points on Tuesday, taking its two-day rise to 37 bps.

The 30-year yield is up around 37 bps over the last two days too. If you exclude the pandemic, this marks the steepest two-day rise in the long bond yield in more than 40 years. Extraordinary, and not a little worrying for policymakers in Washington.

U.S. 10-year yield not dancing to Bessent's tune

Short-term stock price moves are rarely meaningful – especially not when markets are panicking – but the 10-year U.S. Treasury yield's round-trip since President Donald Trump's 'Liberation Day' last week is extraordinary.

    Treasury Secretary Scott Bessent is on record saying he is focused squarely on getting the 10-year yield down, leading investors to surmise that lower borrowing costs are more important to the administration than higher equity prices. This is a major departure from Trump's first term, when he regularly celebrated stock market gains in social media posts.

    To that end, the 10-year yield's slump in the two days after Trump's tariff reveal on April 2 fit the script, though Bessent and Trump would probably have preferred a driving force other than exploding recession fears.

    In theory, lower borrowing costs will cushion the blow that a tariff-weakened economy could inflict on businesses and households. And crucially, they will also ease the federal government's huge debt-servicing burden. Cutting interest rates, as Trump recently implored Federal Reserve Chair Jerome Powell to do, would be an added benefit for everyone.

    But it's not working out that way. Trillions of dollars have been wiped from U.S. stock markets in recent days and interest rate cut expectations have ramped up aggressively, yet the 10-year yield is now above the 4.10-4.20% range it was in on 'Liberation Day'.

    Zoom out further, it's notable that even though the benchmark yield has declined 60 basis points since January, it is still 60 bps above its September low. Or, looked at another way, although the S&P 500 has fallen 17% in the last five months, losing around $9 trillion in market cap, the 10-year yield is essentially unchanged.

    You can always pick and choose your timeframe to suit a narrative, but it is clear that yields are not falling as much as Bessent and Trump would like, or as most observers would expect in such a febrile 'risk off' environment.

    Treasuries are simply not attracting the 'flight to safety' demand from global investors, as they have in almost every period of stock market turbulence in recent decades.

NEGATIVE TRENDS

    What gives? For one, tariffs are typically considered inflationary, at least initially, and inflation forecasts are being ramped up across the board, including at the Fed itself. With inflation still above the Fed's 2% goal and expectations not fully anchored, Powell made it clear on Friday that cutting rates is not the slam dunk it might have been in past crises.

    Economists at JPMorgan noted that Powell's speech was his most hawkish in some time, while economists at Morgan Stanley changed their Fed forecast and now see no rate cuts at all this year.

    Then there's the politics. The widespread derision of the formula used to calculate Trump's 'reciprocal' tariffs and concern about the administration's other controversial policies are shaking overseas investors' faith in the U.S.

"Negative trends in U.S. governance and institutions are eroding the appeal of U.S. assets for foreign investors," wrote Goldman Sachs analysts on Monday. "It is now clear that foreign officials have taken a number of actions to attempt to reduce their reliance on the dollar."

And there is also plenty of Wall Street chatter about whether some central banks may seek to reduce their U.S. bond holdings strategically as a weapon in the global trade war. The focus of this speculation is squarely on China, America's main economic and geopolitical rival, which boasts the biggest bilateral trade surplus with the U.S. and holds large quantities of Treasuries that could be sold.

    Sticky yields, never mind rising yields, hugely complicate Bessent's aim of reining in the near-$1 trillion of net interest payments on U.S. public debt in fiscal year 2024. The Congressional Budget Office expects that figure to almost double to $1.8 trillion by 2035.

Bessent and Trump clearly hope that tariffs will eventually narrow the trade deficit, heralding looser monetary policy and lower yields. But with inflation fears, unprecedented uncertainty and toxic politics thick in the mix, 'eventually' seems a long way off.

What could move markets tomorrow?

* New Zealand interest rate decision * India interest rate decision * Bank of Japan Governor Kazuo Ueda speaks * U.S. 10-year Treasury note auction * U.S. Fed releases minutes from March 18-19 policy meeting

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.

Trading Day is also sent by email every weekday morning. Think your friend or colleague should know about us? Forward this newsletter to them. They can also sign up here.

(By Jamie McGeever, editing by Nia Williams)