Ceasefire, not truce, in global trade war

Posted 11 April 2025

After a week of eye-watering ups and downs, stock markets are roughly where they started but still well below where they were before Trump’s April 2nd ‘Liberation Day’. For bond holders, it has been equally volatile but prices are more than slightly down.

The near-panic in US bond markets dominated the headlines – until Donald Trump once again stole the show. In Wednesday’s surprise announcement, the president stepped back from the brink and delayed his so-called “reciprocal” tariffs for 90 days. Import taxes have been lowered to 10% for almost all countries – except China, who was hit with further tariffs. The White House clarified that China’s tariffs are now at a whopping 145%.

Markets rejoiced at the de-escalation, but positivity faded once investors realised that, after the China escalation, on a trade weighted basis, the average tariff burden is back up to where it was before the ‘reciprocal’ tariffs were suspended. Policy uncertainty therefore remains, damaging growth prospects for this year. It is telling that higher yields were not enough to attract money to the US either, with the dollar having another bad week: falling over 4% against the Euro, 3% against the Japanese Yen and 2.5% against Sterling. Perhaps some investors no longer see the US as a safe haven.

Trump’s unstoppable force meets bond markets’ immovable objection.
Last week, we wrote about the market selloff reaching capitulation levels. This week, it was Trump that capitulated. Interestingly, even the president’s usual defenders pressured him to back down. Treasury secretary Scott Bessent is rumoured to have threatened resignation when urging Trump to relent. The historic stock market surge on Wednesday was not only down to tariffs themselves, but a sense of relief that the world’s most powerful man might be a little more mindful of capital market forces.

The pressure to respond probably came from bond woes more than equities. The yield on US treasury bonds soared at the start of the week, posing a direct threat to government finances that could not be ignored. The tariff climb down seemed to reaffirm the traditional power of bond vigilantes. It reminds us of a famous quote from a former adviser to president Bill Clinton, on his preferred reincarnation: “I would like to come back as the bond market. You can intimidate everybody.”

Exactly how and why bond markets threw a tantrum (including contagion of UK bonds) is a little more complicated, so we devote a separate article to the story. Some think it was triggered by bond sales from the Chinese government – the second-largest foreign holder of US treasury bills – but in the end it felt like Trump’s very own ‘Liz Truss moment’. The Truss bond selloff of 2022 required emergency intervention from the Bank of England – which the Federal Reserve has not yet provided. Given bonds have not fully recovered the Fed may still have to provide support in some way.

Regrettably, we await the Trump show’s next episode.
The 90-day tariff reprieve should mean that things are a little calmer, at least for a few weeks, and if only as far as tariffs themselves are concerned. But we know that the Trump show must always go on. It might just need a new antagonist.

Cue the high-stakes talks between the US, Israel and Iran coming up this weekend. Trump wants a deal that prevents Iran’s nuclear armament, and has warned that the Islamic Republic will be in “great danger” if talks are unsuccessful. We should take that danger seriously, considering how far apart the negotiating parties are. Reportedly, the US and Israel are pushing for nothing short of Iranian surrender, not just on nuclear but on regional intervention too. By contrast, Iran’s foreign minister said the talks were “as much an opportunity as… a test”. The situation presents significant geopolitical risk if talks do not go well.

Investors are still waiting for Trump’s market-friendly policies – tax cuts and deregulation – rather than his trademark disruption. The president has signalled tax cuts are a priority, but the 90-day tariff delay could throw a spanner in the works, given that tariff revenues were supposedly needed to deliver cuts. Stock markets would probably cheer if Trump pushed ahead anyway – fiscal health be damned. But they may think differently if bond traders are spooked and we get yet another ‘Donald Truss’ moment.

Returning liquidity preference makes market gains harder.
The alleviation of pressure on US allies prompted Goldman Sachs to reverse their call prediction of US recession this year (made last week) but Trump stepping back from the precipice does not mean that everything is rosy. Markets seemed to acknowledge that on Thursday, when half of Wednesday’s equity gains were clawed back.

Unlike Goldman Sachs, JP Morgan reaffirmed that they still expect a 2025 US recession. They calculate that tariffs of 145% on Chinese goods and 10% for everyone else will give an average tariff rate around 30%, still a highly disruptive compression on world trade. If import volumes remained unchanged, this would be a $960bn ‘tax’ hike worth over 3% of US GDP, the largest tax hike since WWII.

Chinese exports will not be the same. A big contraction is assured which would mean a lower average tariff closer to the universal 10% level. But the resulting disruption to US supply chains would be a significant blow to the economy, while the shock in China would likely ripple throughout Asia.

The Q1 corporate earnings season has kicked off in earnest, with decent results from banks JP Morgan and Wells Fargo, which helped Friday’s session start well. The next few weeks’ focus will be on forward statements regarding business investment and executive confidence. Despite the US administration’s desire to boost US domestic production, many investors expect that the initial reaction will be caution. At best, that would mean slower growth now, faster growth in 2026.

There is a chance that we see more positive US consumption data in the short-term, as Americans may rush to buy goods in the 90-day window. Interestingly though, March consumer price data suggested that a bump in spending may have already occurred. Even if that short-term boost comes, the medium-term US demand outlook has weakened which is likely to keep profit growth forecasts tepid.

This makes a challenging environment for markets in the near-term. As we discuss in the bond article, there has been a clear decrease in investor risk appetite, and a clear increase in liquidity (cash) preference. That means long-duration assets, like growth stocks, could be more volatile and have less ‘bouncebackability’. Washington’s step back from the brink is a positive – but we should bear in mind that business investors are highly likely to remain wary of putting cash to work at the moment. Trading volumes are thin and this means price action is likely to remain uncomfortable in the days ahead.