Tariff Troubles Are Producing Interesting Market Dynamics

While it has been a chaotic April to say the least, there is at least a crumb of comfort for investors in that Trump appears to be calibrating trade policy in response to some of the extreme market moves which have taken place. The sight of soaring bond yields and plummeting stocks last week most likely played a part in the de-escalatory moves from the White House over the last seven days.

The market has shown signs of stabilisation, but whether the lows for the major US stock indices have already been hit is subject to what happens during this 90-day pause period. Perhaps we will see President Trump start to put pen to paper on deals with several countries and at much lower tariff levels than were announced on ‘Liberation Day’ (April 2nd). In such a scenario, it’s possible although far from a given, that the worst of the turbulence is already behind us. But with Trump due to announce tariff policy on semiconductors and pharmaceuticals in the near-term, all while the world’s two biggest economies remain at loggerheads with one another on the trade front, trading with any sort of conviction right now given all the variables at play remains a tough ask.

Tariff volatility has produced some interesting and in cases perplexing market dynamics, with the breakdown of the relationship between treasury yields and the USD being a prime example. The 10-year US treasury yield and the USD have long enjoyed a historically positive correlation, thanks to higher yields generally being supportive of the greenback. But this month, we have seen the USD and bond yields ‘part ways’ (so to speak) with each heading in opposite directions, likely as a consequence of investors shunning US assets of any description.

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Growth and recession concerns have resulted in US bonds being sold (rather than being bought as generally happens during risk-averse times) which has pushed bond yields higher. The USD, for its part, has been tracking south at a rapid rate of knots, which again, contrasts with its usual attribute of being a safe haven currency. Having began the year around the 108 level (and was at 104 at the start of this month), the Dollar Index (DXY) has sunk below the 100 mark while the euro and yen have been currency market favourites.

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This steep descent of the Dollar has accelerated gains in the gold price. Gold had initially been sluggish last week despite the market turmoil, but the slide in the USD has aided gold in advancing approximately 8% over the past 5 days. Temptation to lock in profit near the all-time highs and tariff policy walk-backs from Trump could prompt gold consolidation around these levels, but momentum still seems to be on the side of the precious metal and further upside looks like it could be in store over coming months, particularly if Dollar weakness persists and financial markets remain in a cautious frame of mind. Levels to watch this week include resistance at $3251, while support arrives at $3205 and further back at $3160.

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