Written by the Market Insights Team
Biggest policy reversal in history
George Vessey – Lead FX & Macro Strategist
It was only a matter of time before markets forced the hand of President Trump. The plunge in equities, including a 20% drawdown in the Nasdaq, left Trump unfazed, holding firm on his aggressive tariff policies. However, it appears it was the intense selloff in US bonds this week that prompted the President to execute one of the biggest economic policy reversals in modern history.
Before the sun set on “reciprocal tariff day” Trump announced a 90-day pause on tariffs for most countries, which saw stock markets roar back with a vengeance. The S&P500 surged over 9% and the Nasdaq over 12% – both staging one of their biggest one-day gains on record. The Magnificent Seven surged as much as 11%, the largest gain since the index’s creation in 2015. Curiously, the recovery in stocks came about three hours after Trump urged Americans to stay calm and continue investing…
Part of the Trump Administrations’ plan was to get rates down, but with long-end yields surging higher on stagflation fears, the White House went from declaring no exemptions, no pauses and negotiations one country at a time to eliminate every trade deficit – to a 90-day pause with tariffs dropping to 10% on the majority of the countries on the original list. Apart from China that is. China now faces 125% levies on all goods exports in response to an earlier move by Beijing.
The tariff pause allows for strategic negotiations, which is good news, but the most critical factor for the global economy remains in escalation mode – this trade war is really only about the US versus China. Will Xi reverse course in attempt to de-escalate? Moreover, markets may be overlooking the fact that a 10% tariff on everything isn’t nothing, and the reality is more uncertainty, and a lack of clarity, for the next three months.
FX markets remain on edge. Safe havens have been sold heavily on the pause news, while those EM and commodity-linked currencies in the firing line of a global trade war have come back strongly. Overnight volatility in the major currencies remains elevated despite tariff reprieve as traders turn focus to today’s release of US inflation data.
Bond sell-off went too far
George Vessey – Lead FX & Macro Strategist
A mass departure from longer-dated US Treasuries drove yields sharply higher, triggering the most significant selloff in these so-called safe assets since 2020. Rising borrowing costs were delivering yet another blow to the global economy, already strained by President Trump’s aggressive tariff policies.
Interest rate differentials – the gap between two countries’ interest rates – act like magnets for investors’ money and play a key role in shaping exchange rates. We’re now observing a shift in dynamics though. The reversal in the usual relationship between US Treasury yields and the dollar suggests that markets are now demanding higher risk premiums on traditionally safe US assets.
This shift likely stems from concerns about stagflation, reputational damage and missteps in policymaking. Other factors include hedge fund deleveraging, speculation of foreign investors offloading US bonds, and a shift toward cash-like shorter-term securities as risk assets falter.
Higher yields, impacting everything from mortgages to loan rates, are undermining a key objective of Trump’s economic policy – lowering borrowing costs to benefit consumers, as highlighted by Treasury Secretary Scott Bessent.
The bottom line – investors were gripped by concerns that something may break in the financial plumbing as volatility and stress build across markets. It seems the bond sell-off went to far and forced Trump to surrender.
Pound recovers with equities, but bonds pose a problem
George Vessey – Lead FX & Macro Strategist
Stress in the bond markets has been evident in the UK too. Yields are rising as worryingly as they are doing in the US and this poses a headache for the UK government’s finances, which is already challenged by tight public finances and a weakening growth outlook. The Bank of England (BoE) has stated the global risk environment has deteriorated, and uncertainty has intensified. The pound has had a torrid week against most peers, especially the yen and swissy, down 2% and 3% respectively before the tariff delay was announced.
What’s interesting is the divergence in yields across the curve. Long-dated yields are rising amid renewed inflation fears driven by escalating US-China trade tensions. For example, the UK’s 30-year gilt yield, rose to its highest level since 1998. In contrast, fears of an economic slowdown has left the 2-year yield relatively unchanged as investors ramp up bets on BoE rate cuts. Markets now price in 93bps of easing this year, including growing expectations of a 50bp cut in May. Meanwhile, if the BoE determines the gilt market is becoming dysfunctional, it may be forced to pause its bond selling programme.
What about the pound? The relief rally in global equity markets, and prospect for stabilization in the UK bond market, is fuel for a recovery in the UKcurrency. GBP/USD is back above $1.28 as risk appetite returns, but the big talking point is GBP/EUR which had suffered its biggest 5-day drop since 2020 and was trading near 1-year lows as traders flocked to the high-liquid appeal of the euro. The pair sharply went into reverse though and now today trading back above €1.17 following Trump’s capitulation to market forces.
More broadly, sterling is becoming increasingly sensitive to market risk. No longer is it being dubbed a tariff safe haven. It continues to fluctuate against most of its peers in line with broader market sentiment and due to the fact the UK will not come away unharmed by a global trade war and economic slowdown.
The direct effect of tariffs looks relatively small because Trump’s regime did not include services exports, which make up the majority of the UK’s nearly £900bn of annual exports. However, lower global demand will hit the already feeble UK economy, which has barely grown over the past six months.
S&P500 erases losses
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: April 7-11
All times are in BST
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
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