Trading Day: Tariff uncertainty still runs deep

By Jamie McGeever

ORLANDO, Florida (Reuters) - TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist 

Slow down, you're moving too fast

A relatively quiet day on Monday with some key markets closed saw Asian and European stocks extend their recent rebound but Wall Street stumble after U.S. President Donald Trump's latest tariff salvo, despite more signs of underlying strength in the U.S. economy.

U.S. stocks have bounced back strongly from their post-'Liberation Day' lows a month ago. But is this general positivity justified? More on that below, but first, a roundup of the main 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. Taiwan president calls for end to 'false' news about USforex talks 2. Japan says no plan to threaten Treasuries sale in UStrade talks 3. Deep cuts or none at all? A gulf exists in Fed views:Mike Dolan 4. Fed policymakers expected to keep rates steady astariffs roil outlook 5. World economy already feeling drag from Trump tariffs

Today's Key Market Moves

* Taiwan's dollar rallies another 3% to a three-year highthrough 30.00 per U.S. dollar. Its 6% gain since Friday is arecord two-day rise. * Japan's yen is the biggest mover in the G10 FX space,rising around 0.5% towards 144.00 per dollar. * U.S. Treasury yields rise across the board, by as much as5 bps at the long end, bear steepening the curve. * Oil falls again - Brent crude and WTI futures slide tofresh 4-year closing lows of $60.32/bbl and $57.13,respectively. * Gold snaps out of recent drift lower, spiking 2.4% to$3,320/oz. * Wall Street ends lower, with the Dow down 0.2%, the Nasdaqdown 0.7%, and the S&P 500 snapping its longest winning streaksince 2004 to close 0.6% lower. * Shares in Berkshire Hathaway fall nearly 5% after94-year-old CEO Warren Buffett announces he is stepping down. * Europe's STOXX 600 index rises for a 10th consecutivesession, its longest winning streak since August 2021. * Germany's DAX climbs 1.3% - its ninth straight gain - towithin touching distance of March's record high of 23,476points.

Tariff uncertainty still runs deep

World markets are in limbo, with investors hoping for concrete progress in Washington's bilateral trade deal talks with dozens of countries but wary that the rally in risk assets over the past month could be losing momentum.

Trump's decision on Sunday to slap 100% tariffs on foreign-made movies brought into the U.S. was a sign that perhaps he isn't turning quite as conciliatory as investors had hoped. Or it may be a reminder of how erratic his tariff policymaking agenda still is.

Either way, it was enough to help snuff out Wall Street's nine-day upswing on Monday, in contrast to key markets in Asia and Europe that maintained their longest winning streaks in years. Will they run out of puff on Tuesday?

It might be a low bar, but there were two developments over the weekend that could help investors keep a 'glass half full' view of markets - Trump pledged not to fire Fed Chair Jerome Powell, and Japan's finance minister Katsunobu Kato said Japan has no plans to threaten to sell its $1 trillion-plus holdings of U.S. Treasuries in trade talks with Washington.

And Treasury Secretary Scott Bessent on Monday repeated his belief that tariffs, alongside the administration's tax cuts and deregulation agenda, will drive growth to near 3% this time next year.

The U.S. economic data is mostly coming in on the stronger side of expectations, giving the Fed more breathing space, although how much longer that lasts remains to be seen.

Some Asian currencies are clocking their biggest gains in years, and on Monday car giant Ford pulled annual guidance. Tariff uncertainty is still running deep.

Wall Street's 'fever dream' could end in cold sweats

Wall Street's recent rebound from its April lows suggests equity investors are pricing in a benign outlook for the U.S. economy, which contrast starkly with the more ominous signals coming from the oil, gold and fixed income markets. Is this justified confidence, or dangerous complacency?

    If you had turned off all communications on April 2 and logged back on today, you would find the S&P 500 roughly unchanged, with no sign of the 15% slump suffered in the days immediately following President Donald Trump's April 2 tariffs announcement.

    The S&P 500 has risen nine days in a row through May 2, its best daily winning streak in 21 years. Meanwhile, the "S&P 493" - the broad index excluding the "Magnificent Seven" tech megacaps - is flat for the year to date, also remarkable given the tumult over the past four months.

    Contrast that with other markets.

    Oil on Friday had its lowest close in four years and is down 25% on a year-on-year basis. While this partly reflects calls for accelerated output hikes by OPEC+, the macroeconomic signals flashing here are pretty clear: weak demand, sluggish growth and disinflation.

Gold, meanwhile, is up 25% this year and still above its "Liberation Day" close, despite drifting down from its recent record high of $3,500 an ounce. While this is not an indication of heightened disinflation fear, it is a sign of elevated fear overall. Bullion's allure as the world's premier safe-haven asset has rarely been stronger.

    And what of U.S. Treasuries? The two-year yield has rebounded in recent days but is still 40 basis points lower this year, and rates traders are still anticipating at least three quarter point cuts from the Federal Reserve this year. Both are pricing in meaningful economic slowdown.

COLD SWEATS

Is this simply an example of the old adage that equity investors are paid to be optimistic while bond investors are paid to be pessimistic?

    Perhaps, but there is some justification for Wall Street's optimism. It's largely rooted in the view that the economic damage inflicted by tariffs won't be as bad as feared a few weeks ago, partly because the Trump administration has backpedaled in the face of market ructions. In other words, the "Trump put" is back.

Investors also have reason not to be too worried about the 0.3% GDP contraction in the first quarter, as it largely reflects the front-loading of imports, a statistical anomaly that will be quickly reversed.

    It was a "gross distorted product", according to Goldman Sachs economists, who anticipate a 2.4% GDP expansion in the second quarter.

    Moreover, while "soft" economic data like consumer sentiment indicators continue to flash red, much of the "hard" data, like employment figures, is holding up well.

    And even if real growth this year is only 0.5% - Goldman's estimate, which is at the lower end of forecasts - that still implies nominal growth of close to 5%, if inflation tops 4%, as many economists expect.

    Importantly, earnings are driven by nominal growth rates. While first quarter earnings are obviously "rear-view mirror" numbers in the context of the trade war, around 74% of the 357 companies in the S&P 500 that have reported so far have beaten analyst estimates, according to LSEG's Tajinder Dhillon. This compares to a long-term average of 67.0%.

    And the 12-month forward growth expectations for the S&P 500 are still running at a punchy 10%.

    But that's not the whole story. Many firms have slashed forecasts or declined to give any guidance at all.

    Even though Trump seems very likely to dial down his initial tariff numbers, the cost of doing international business is still going to rise significantly. Whether that cost is borne more by businesses or consumers remains to be seen, but in the broader context of economic activity and corporate profitability, the effect will be the same.

    Tariffs haven't bitten yet, but they will. In an interview with Bloomberg TV on Friday, Gene Seroka, executive director of the Los Angeles port - the biggest in the country - pulled no punches: "CEOs are telling me, 'hit the pause button'. Hiring, off the table for right now. Capital investment, pause. And the retailers are telling me that even 10% (tariffs), 'I'm going to have to pass it on to the consumers'."

    Bob Elliott, CEO at Unlimited Funds, reckons equities are priced as if the last month was a "fever dream". The risk is that investors break out in cold sweats in the months ahead.

What could move markets tomorrow?

* China 'unofficial' Caixin services PMI (April) * Euro zone producer price inflation (March) * Trump to meet Canadian prime minister Mark Carney at theWhite House * U.S. Treasury 10-year note auction * U.S. trade (March)

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)