Optimism overrides fear
Markets sighed a relief on Thursday as President Trump’s much feared announcement of reciprocal tariffs was seen to be another negotiating tactic rather than a major escalation of the trade war. Although Trump is targeting every trading partner of the United States with these latest measures, aiming to replicate any tariff or non-tariff charges imposed on US goods, it could be months before the details are finalized.
Trump’s nominee for Commerce Secretary flagged April 1 as the likely timeline for the studies on the individual levies each country should be charged to be ready. Investors have interpreted this as a possible window for negotiations.
Given how the 25% tariff threat played out with Canada and Mexico, there is every reason to believe that Trump won’t follow through with much of the tariff hikes he’s proposing and wants to squeeze out as many concessions as possible.
Markets see through latest inflation spike
But whilst it’s too early to predict which way negotiations with major trading partners such as the European Union, UK and Japan would go, investors seem to be betting that Trump won’t do anything to jeopardize the US economy or to fuel inflation.
For now, the latter appears to be a bigger risk, yet markets are once again seeing the glass half full. Data released yesterday showed that US producer prices rose more than expected in January. A day earlier, the CPI report for the same month also came in hotter than anticipated.
Inflation in America is far from being under control and investors now see only a one in three chance of a second rate cut by the Fed this year. However, hopes that the PCE inflation numbers due at the end of the month will be much softer than the CPI and PPI reports, are feeding the risk appetite that’s been slowly strengthening this week.
Dollar takes a tumble, yen underperforms
US Treasury yields, which had climbed to three-week highs on Wednesday, slid sharply yesterday, pulling the US dollar to near two-month lows against a basket of currencies. This gave the euro and pound a much-needed lift as they are seen as somewhat more vulnerable to Trump’s trade tirade.
The aussie and kiwi, which are more likely to evade punitive levies, are the next best performers of the week, while the yen is headed for weekly losses. President Trump has reportedly singled out Japan and South Korea in terms of unfair trade practices and this has limited the yen’s gains versus the dollar, while the risk-on mood has led to losses against other majors.
Equities headed for strong weekly gains
On Wall Street, the S&P 500 soared by 1%, closing just shy of its January 23 all-time high. The Nasdaq also rallied but remains some distance from its mid-December record peak.
In Europe, the major bourses such as the German DAX and the FTSE 100 in London have already been scaling record highs this week, while Chinese AI stocks listed in Hong Kong have been surging following the DeepSeek headlines.
Gold underpinned by Trump uncertainty
However, it’s doubtful if this risk rally is built on solid foundations. Even if Trump is open to compromise, negotiating with every country in the world could be quite a challenge for the administration and in the meantime, the daily barrage of tariff news is likely to create a lot of uncertainty for businesses.
Moreover, the best case scenario that there would be only a minimal impact of higher tariffs on inflation is not a guarantee that the Fed will be able to resume its easing cycle anytime soon. The reaction to this week’s worrying inflation data is odd to say the least and markets could soon face a reality check.
Yet, amidst this upbeat shift in tone, gold has continued to advance higher, potentially indicating that not all investors are convinced that all is well in the world. The precious metal is fast approaching the $2,950 mark as it aims to set another record high.
By XM.com
