Trading Day: Market nurses huge hangover as tariff reality sets in

ORLANDO, Florida (Reuters) - TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist 

Desperately seeking safety

After Wall Street clocked one of its best days in history on Wednesday, a sense of sober realism was always likely to return on Thursday. But few would have anticipated such a sudden, screeching reversal in sentiment.

Stocks sank and demand for 'safe-haven' assets exploded - gold leaped 3% to a new high and the Swiss franc had one of its best days ever. Maybe U.S. President Donald Trump's tariff truce on Wednesday wasn't as conciliatory as it first seemed.

More on that below, but first, a round-up of the main market moves on another extraordinary day. 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. 

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.

1. Tariffs caused US Treasury market dislocations, raisinglonger term concerns 2. Global investors hunker down for volatility even astariff pause is welcomed 3. Trump tariff pause does not change fundamentals for aFed that sees risks ahead 4. Wall Street's week of whiplash brought fear, relief andcaution 5. Safe European home? Scared money seeks German bunds

Today's Key Market Moves

* The S&P 500 tumbles 3.5%, the Nasdaq 4.3% and the Dow2.5%. * All 10 sectors in the S&P 500 decline, led by a 6.4% slidein energy. * The euro hits a near two-year high of $1.1241, rising morethan 2% for its best day since December 2015. * The Swiss franc rallies 4% to a 10-year high, its biggestgain since January 2015, ranking among its top 10 best daysever. * Gold leaps 3% to a new high of $3,176/oz. * U.S. Treasuries rally at the short end of the curve,pushing yields down as much as 15 basis points. But the long endsells off. * A $22 billion auction of 30-year Treasuries draws soliddemand, but the yield rises again and is eyeing its biggestweekly rise - 46 bps - since 1982. * Oil slides nearly 4% as investors reassess the globaldemand outlook. * Japanese stock futures point to a 4% fall at the open onFriday, reversing much of Thursday's 9% rise. * Bitcoin falls 4%. * China's 'CNH' offshore yuan strengthens but overallpressure on the Chinese currency is still to the downside. Theonshore yuan is at a key level around 7.35 per dollar.

Market nurses hangover as harsh tariff reality sets in

The relief from Trump's tariff climb-down was visceral, but fleeting. Global trade tensions may have cooled a bit, but the outlook for consumers, businesses and investors is as murky as it was before Trump's surprise Truth Social post on Wednesday.

Whatever concessions he offered to the rest of the world were essentially offset by the extra duties slapped on imports from China. The world's two economic superpowers are locked in a full-scale trade war, a confrontation with no winners.

Former U.S. Treasury Secretary Janet Yellen, in her first broadcast interview since leaving office, told CNN International that the likelihood of a U.S. recession has risen, and slammed Trump's tariffs as a terrible "self-inflicted wound".

In financial market terms, the big losers on Thursday were assets leveraged to growth and risk appetite like stocks, oil and bitcoin. The big winners were safe-haven plays like the Swiss franc and gold.

The franc's 4% rally against the dollar was stunning. Not only is that its biggest rise since the Swiss National Bank scrapped the franc's cap in January 2015, it's among the top 10 since the era of free-floating exchange rates was introduced more than 50 years ago.

The euro rallied sharply too and German government bonds outperformed U.S. Treasuries, suggesting investors switching out of U.S. assets may be turning to Europe. There's a case to be made for it - there are few sufficiently liquid alternatives.

Economic data and commentary from central bank officials are playing second fiddle to trade issues for investors right now, evidenced by figures on Thursday that showed a surprising fall in U.S. inflation in March. Treasury yields fell a bit, but not across the whole curve and not as much as one might expect with Wall Street falling so steeply.

A solid 30-year bond auction - demand for the $22 billion sale was the strongest since November - failed to prevent long-dated yields from rising. Just as tariff fears haven't dissipated, nor have concerns over the long end of the U.S. Treasury curve.

U.S. still facing 1930s tariff shock, vice tightens around China

With the dust now settled on the euphoric market rebound following President Donald Trump's trade war climb-down, investors are realizing that the global economy still faces the most punishing U.S. tariffs in nearly 100 years.

The picture is marginally brighter than it was before Trump blinked at 1:18 p.m. Eastern Time on Wednesday and announced a 90-day hiatus and a reduction to 10% for most of his 'reciprocal' tariffs. Washington is now pursuing negotiations with its trading partners and most retaliatory measures have been put on ice.

But the big picture remains pretty dim.

    Analysis published by the non-partisan Budget Lab at Yale on Thursday suggests U.S. consumers will face an overall average effective tariff rate of 25.3%, only "slightly different" from before Trump's pullback, and the highest since 1909. Even accounting for likely consumption shifts away from Chinese goods the average tariff rate will be 18.1%, the highest since 1934.

    "It's clear the U.S. economy hasn't seen a shock like this since the 1920s and 1930s," PIMCO economist Tiffany Wilding wrote on Thursday.

    She estimates that every percentage point increase in the average effective tariff rate shaves about 0.1 ppt off U.S. growth and adds a similar amount to inflation. She says U.S. recession is now likely, as is core inflation surging to 4.5%. That's a dismal picture.

TIGHTENING GRIP

By some measures, the trade war's vice-like grip on the global economy has tightened, particularly because of the pain being inflicted on China.

    Essentially, any semblance of a truce in Trump's broad trade war is being offset by the ratcheting up of tensions with China. Levies on Chinese goods are now an eye-popping 145%, the White House on Thursday.

    As Pictet Wealth Management's Frederik Ducrozet notes, the global trade war narrowed on Wednesday, but it also deepened. A "full decoupling" between the U.S. and China, the world's two largest economies, is playing out in front of our eyes.

Little wonder that China's stock market significantly lagged its regional and global peers on Thursday, although eking out a 1.3% rise was an achievement given the increasingly alarming U.S.-China standoff.

    TD Securities strategist James Rossiter calculates that the import-weighted average U.S. tariff has actually risen to 26.2% from 23.9% on April 2, Trump's 'Liberation Day'. Of course, if U.S.-China trade collapses, as could happen if neither Washington or Beijing backs down, the average effective rate will be closer to the global 10%.

    But freezing the two-way flow of nearly $600 billion in annual trade isn't exactly bullish, as investors realize - in U.S. trading hours on Thursday stocks plunged again, and 'safe-havens' like the Swiss franc, gold and short-dated Treasuries surged.

CUE THE YUAN DEVAL?

    So what are China's options? Policymakers in Beijing were already facing an unenviable domestic situation - a real estate crash, deflation and moribund demand and investment - and Trump's belligerence can only make that more difficult.

If the economic battle lines between the world's two economic superpowers are being marked by tariffs, the market battle lines are being drawn by the dollar/yuan exchange rate. In bright Technicolor, too.

It's hard to envisage how China withstands or fights back against such punitive tariffs without a significant depreciation of its tightly controlled yuan, or perhaps a much bigger devaluation.

The currency market is leaning heavily that way: onshore spot dollar/yuan is a whisker from levels last seen in December 2007; Thursday's central bank dollar/yuan fixing of 7.2092 yuan was the highest since September 2023; the offshore 'CNH' dollar/yuan rate touched a record peak of 7.4287 on Tuesday.

    Economists at Goldman Sachs on Thursday slashed their Chinese GDP growth forecasts to 4.0% this year and 3.5% next year from 4.5% and 4.0%, respectively. They also said that they expect "significant" monetary and fiscal policy easing from Beijing.

No matter who blinks first in the coming months – Trump or President Xi Jinping – the rest of the global economy probably won't like what it sees.

What could move markets tomorrow?

* ECB President Christine Lagarde holds press conference atEurogroup meeting * U.S. producer price inflation (March) * U.S. University of Michigan inflation expectations (April) * U.S. Fed policymakers Susan Collins, Alberto Musalem andJohn Williams speak at separate events

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)