For the better part of a day, it seemed as if the panic that Donald Trump’s trade war unleashed had largely subsided as US equities built on strong rallies in Asia and Europe.
But as the session wore on, that optimism slowly, then quickly, gave way, replaced by the kind of vexing bouts of volatility that had punctuated markets and pushed stock losses past US$10 trillion in the past three days.
Ultimately, investors in markets from stocks to bonds and currencies were once again left trying to answer the same uneasy question: Is the US president truly willing to risk a worldwide recession to rewire global trade?
That tension was most apparent in the US stock market. The S&P 500 Index rallied as much as 4% in early trading in what was its biggest advance since 2022, on signs Trump was open to negotiating trade deals. Yet it ended down 1.6% after the White House said it’s pressing ahead with its tit-for-tat retaliation against China. The market’s fear gauge, the VIX Index, also shot back up, after easing, to finish at the highest since the pandemic.
In US Treasuries, yields did another abrupt U-turn after Monday’s dizzying spike — with the 30-year yield surging in late trading to record the steepest two-day climb in five years — as a weak debt auction sowed fears of a buyer’s strike among overseas investors. And in foreign exchange, speculators piled into the Japanese yen and Swiss Franc, two haven currencies in times of distress.
“The path forward has only become more murky,” said Andrea DiCenso, co-portfolio manager of the Alpha Strategies team at Loomis, Sayles & Company, at a media event. “We are all beholden to one person’s decision making.”
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Stocks Hit by Wild Volatility on US-China Threats | The S&P 500 fluctuated between gains and losses Tuesday
That realization dashed what had been a welcome respite for much of the day from the selloffs and convulsions that had rocked markets ever since Trump’s tariff plans upended the outlook for global growth in a matter of days.
Yet even as the S&P 500 bounced back and the bond market returned to a semblance of normalcy, doubts were already creeping in about whether it would last. Some of it was seen as potential short-covering by hedge funds that had significant bearish positions, with markets still vulnerable to another leg down as it remains unclear how aggressively Trump will stick to his trade war.
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“When volatility acts like this, liquidity dries up and there’s often times where things can move in ways that don’t necessarily make sense,” said Matt Miskin, the co-chief investment strategist at Manulife John Hancock Investments.
Even as comments by Treasury Secretary Scott Bessent and Trump fueled optimism that his tariffs may be negotiated downward, there remained little doubt that his chaotic rollout, no matter how it ends, will take an economic toll by severing supply chains, casting uncertainty over businesses and sowing anxiety among consumers.
High-Grade Credit Risk at Highest Since October 2023 | A gauge of perceived risk in the US investment-grade market jumped
As recession fears build, markets have continued to flash warning signs. Oil resumed its slide Tuesday to fall near US$58 a barrel. Financial conditions more broadly have tightened as Treasury bonds defy their usual role as a haven, with the 10-year yield shooting back up near 4.3%, higher than it was at the end of March, pushing up the cost of mortgages and other kinds of loans.
The 30-year bond ended at 4.76%, nearly a half-percentage point higher than its lowest point on Monday.
The upward pressure on US government borrowing costs may continue as the tariffs threaten to deliver another inflationary shock and worsen the deficit if tax revenue falls due to a slowdown in activity.
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“Plans for a new wave of US tariffs and responses from other countries reinforce that we will be in a world where interest rates – and long-term bond yields – stay higher than pre-pandemic,” said Jean Boivin, head of the BlackRock Investment Institute.
The worries about just such a wave of new US tariffs set off another rapid about-face in markets late in the day as Trump showed little interest in backing down. While he spent the final hours before his tariffs were set for full implementation lining up negotiations with key US allies, his insistence on pushing forward with sweeping 104% tariffs on many Chinese goods significantly escalated the stakes.
“It’s a game of chicken right now between the market and government,” said Que Nguyen, chief investment officer of equity strategies at Research Affiliates.
